Canadian Retail Markets Study

A Review of Competitiveness in the Canadian Refined Petroleum Marketing Industry
Prepared For: Industry Canada Natural Resources Canada Canadian Petroleum Products Institute

September 15, 1997
Suite 413, 1333 - 8th Street SW Calgary AB T2R 1M6 Canada 403-283-8704

Table of Contents
List of Figures _____________________________________________________ i List of Tables ______________________________________________________ ii Executive Summary _______________________________________________ iii Introduction _______________________________________________________ 1 Background Study Overview Report Format and Conventions Acknowledgments An Overview of the Model Competitiveness: The Pump Price Model in Motion Canada’s Petroleum Industry: Upstream and Downstream Upstream Industry Petroleum Refining Petroleum Marketing Taxation on Petroleum Products Pump Price/Margin Model: An Integrated View Marketing Sector Overview Competitiveness in the Retail Gasoline Sub-Sector Retail Gasoline Demand National Retail Petroleum Outlet Representation Retail Petroleum Outlet Modes Outlet Throughput Ancillary Services Gasoline and the Consumer Price Index Key Price History Margin History Canada vs. US Price History Rack Price History Demand vs. Price History 1 2 2 2 4 5 7 8 9 12 14 16 17 19 23 24 25 28 29 30 31 32 34 35 36

Part A Pump Price/Margin Model ____________________________________ 4

Part B The Structure of the Retail Petroleum Products Sub-Sector ________ 16

Part C Historical Trend Analysis ____________________________________ 30

Part D Selected Markets Study ______________________________________ 38

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Introduction Methodology Study Market Findings Market by Market Competitive Analysis Findings Conclusions Recommendations

38 38 42 52 72 74 80

Part E Findings, Conclusions & Recommendations _____________________ 72

Appendices _______________________________________________________ 82 I Glossary of Terms________________________________________________ 83 II Source Data Tables ______________________________________________ 85 Table A: CPI Index: Selected Goods and Services Table B: Key Price / Margin History - Regular Gasoline Table C: Canadian Supply, Inventory, Demand, and Pump/Rack Prices Table D: Pump Price History - Study Markets Table D: Pump Price History - Study Markets (cont’d) Table E: Ex-tax Pump Price History - Study Markets Table E: Ex-tax Pump Price History - Study Markets (cont’d) Table F: Rack Prices - Study Markets Table F: Rack Prices - Study Markets (cont’d) Table G: Study Market Data - Throughput and Price by Grade Table H: Study Market Data - Rack Price, Tax (by Grade) Table J: Study Market Data - Blended Prices, Costs, Margin Table K: Study Market Data - Sales, Revenue, Outlet Costs, Income Table L: Study Market Data - Demographic Profiles 85 86 88 90 91 92 93 94 95 96 97 98 99 100

III Sources of Information about the Downstream Petroleum Industry____ 101

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63 Figure 34: Montreal .. 69 Figure 36: Halifax ..................................................... ex-tax elements .......1988-1995 ........ Pump Price (nominal ¢/litre)................... 71 MJ ERVIN & ASSOCIATES i ...........................................Price History ........................................................................ 29 Figure 9: Annual Gasoline Price (Cents per Litre) ............................................. 46 Figure 23: Average Annual Throughput per Outlet...................................................................................................................................... 45 Figure 22: Petroleum Gross Product Margins .....................................................................................Price History ..................................................................................................................................................................................................................................... 30 Figure 10: CPI Index Comparison .............. 32 Figure 12: Monthly Margins 1991-1996 (Nominal $)................................................................................................................Price History ....................Price History.................................................................................... 53 Figure 28: Vancouver .............. 18 Figure 4: 1995 Refined Petroleum Products Demand by Product Category............ 35 Figure 16: Monthly Demand vs....... 4 Figure 2: 1996 Average Prices/Margins .... 24 Figure 6: 1995 Retail Outlets by Province ............................................................Price History............................................................. 25 Figure 7: Outlet Representation by Mode......................Price History ......................... 36 Figure 17: Study Market Methodology ..........Selected Goods & Services .................................. 31 Figure 11: Monthly Prices 1990-1996 (Nominal $) ............................ 42 Figure 19: Pump Price .............. Costs................................................ 48 Figure 25: Outlet / Volume Relationship .... 49 Figure 26: Outlet Revenues................................................................ Income..........................Regular Unleaded ................................. 57 Figure 31: Winnipeg ............................. 28 Figure 8: Outlet Representation by Service ............ 66 Figure 35: Saint John NB ..Price History........................................................ 62 Figure 33: Ottawa . 70 Figure 37: Charlottetown ......................................Regional & Urban Groupings....... 34 Figure 14: Canada / US Monthly Pump Price (Nominal $) .......................................................... 24 Figure 5: Canadian Retail Outlet Population .... 43 Figure 20: Ex-Tax Pump Price Elements ....................... 33 Figure 13: Monthly Gross Marketing Margins...........................................................................................................................tax.. 58 Figure 32: Toronto ................................................... 50 Figure 27: Victoria ........................................................ 40 Figure 18: 1995 Average "Blended" Pump Price ....................................................................Selected Centres ............ 34 Figure 15: Monthly Rack Prices: Selected Markets ....................................................................8¢ Pump Price) ................................................Price History ............................................................................. 44 Figure 21: Gross Marketing Margin Elements ................... 47 Figure 24: Outlet Volume vs......Price History .............................................................................................................................................List of Figures Figure 1: Pump Price / Margin Model............................................Price History............... 16 Figure 3: 1996 Average Regular Gasoline Margins (56........................................................Price History.............................. 56 Figure 30: Regina ................................................... Gross Product Margin .................................... 54 Figure 29: Calgary .....

......................................................................................... 39 Table 4: Estimated Cash Flow from Consolidated Net Revenue.......... 1996 .....................List of Tables Table 1: Downstream Sales Channels ........... 13 Table 2: Taxes on Regular Gasoline on December 31........................................... 51 MJ ERVIN & ASSOCIATES ii ...................................................................................... 15 Table 3: Selected Study Markets .......

and a foundation for effective policy development. This margin represents gross income (after wholesale product cost and freight costs) available to provide for retail marketing operations including outlet costs. supplier costs and profitability. The model also illustrates that each sector margin is defined by the price at which feedstock or wholesale product is bought and then sold. Natural Resources Canada (NRCan). forms a comprehensive overview of the competitiveness of the downstream petroleum industry in Canada.2 ¢ 24. These prices are determined in a competitive marketplace.8 ¢ TAX 28. each with unique MJ ERVIN & ASSOCIATES iii . dealer income.6 ¢ EX-TAX PUMP PRICE RACK PRICE DOWNSTREAM MARGIN MARKETING MARGIN REFINER MARGIN UPSTREAM PRODUCT MARGIN FREIGHT 3. This Retail Petroleum Markets study provides a practical tool for understanding the dynamics of this vital and complex industry. and the Canadian Petroleum Products Institute (CPPI).5 cents per litre on the sale of regular gasoline in a typical major urban market. represented by crude.1 ¢ 5.Executive Summary Study Objectives The Canadian Retail Petroleum Markets Study is a joint initiative of Industry Canada. Price competition occurs at three distinct levels in this industry.Regular Gasoline 10 City Average NOT TO SCALE PUMP PRICE 56. This study. together with a separate review of the refining sector. the Canadian retail marketing sector realized an average gross product margin of 3. 1996 Average Prices and Margins .3 ¢ CRUDE PRICE source: Natural Resources Canada The model shows that in 1996. Pump Price/Margin Model The study presents a model which serves to illustrate the interrelationships between the many stakeholders who ultimately receive the revenue from the sale of a litre of gasoline. and ex-tax pump prices. rack.3 ¢ 28.5 ¢ 0.4 ¢ 19.

500 retail outlets were in operation in Canada in 1995. and the traditional automotive service bay. and declined by 10 cents per litre measured in constant dollars.000 in 1989. The Canadian retail gasoline marketing sector is but one element of a much larger industry infrastructure. Approximately 16. The resultant margins are therefore a reflection of the state of product supply. due to its prominence in the public and media domain. this study focuses on the retail gasoline sector. ex-tax pump prices declined by 4 cents per litre measured in nominal dollars. Dealers have a variety of relationships with their supplier. From 1986 to 1995.dynamics. which potentially allow for reduced margins at the gasoline pump. demand and other competitive factors existing at the time. nine of the past ten years. well over half of all outlets in Canada operate as lessees or independents. car wash. The Structure of the Retail Petroleum Products Industry Retail petroleum marketing is typified by the retail “gas station” outlet. encompassing several marketing channels which provide a range of petroleum products to industrial and domestic consumers. compared to about 22. Ancillary or non-petroleum revenue is an increasingly important feature of the retail gasoline marketing industry. Annual Gasoline Price in Cents per Litre 60¢ Nominal 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Source: NRCan 15¢ 1986 1987 1988 Including Tax Constant $ Excluding Tax Nominal Constant $ 1989 1990 1991 1992 1993 1994 1995 Source: Natural Resources Canada (Nominal $). While each of these marketing channels operates in a competitive environment. Historical Trends Changes in the average gasoline prices in Canada have remained at or below the “All Items” Consumer Price Index (CPI). are examples of ways in which outlet petroleum sales are augmented by other revenues. Convenience store. Statistics Canada (Constant $) MJ ERVIN & ASSOCIATES iv . and accordingly. the responsibility for deciding upon retail pump prices resides principally at the local dealer level.

crude) 5¢ Marketing Margin (retail . As a result of these trends. and has been a result of several factors including: • • • improved refinery utilization and efficiency. From 1991 to 1996. MJ ERVIN & ASSOCIATES v . and emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. as a consequence of refinery plant rationalization (closures) and a modest demand increase.The “tax-included” nominal pump price increased over this same period. improved retail outlet sales performance as a consequence of retail outlet rationalizations and demand increases. Canadian average ex-tax pump prices in major markets have been virtually identical to those of the United States since mid-1994. both refiners and marketers have experienced a decline in margins as a result of price competition at the rack and at the retail pump. while (average) combined gross refiner and gross marketing margins decreased by about 7 cents per litre. This has both resulted in. Monthly Margins in Nominal Cents per Litre 30¢ Tax Content 25¢ 20¢ Canada Avg. however. the average tax content of regular gasoline pump prices in major Canadian cities increased by about 5 cents per litre.rack) Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Apr-91 Oct-91 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96 0¢ source: Natural Resources Canada Despite an upwards trend in world crude prices since 1991. Regular Gasoline Downstream (Marketing + Refiner) Margin 15¢ 10¢ Refiner Margin (rack .

US Monthly Pump Prices 65¢ 60¢ 55¢ 50¢ Price per litre 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Apr-93 Oct-93 Jan-93 Jan-94 Jul-93 US Pump Price (Cdn ¢/l) Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-95 Jan-96 Oct-96 Jul-94 Jul-95 Jul-96 Excluding tax Canada Pump Price US Pump Price (Cdn ¢/l) Including tax Canada Pump Price source: Natural Resources Canada Selected Markets Study As part of this study. although this study provides an independent confirmation of this. from 3 cents per litre in Toronto to 14 cents per litre in Gaspé. 19 markets representing a broad range of conditions. which led to two key findings: • Larger population centres and their surrounding communities consistently exhibited lower pump prices and narrower gross product margins than smaller. wholesale product cost and freight charges) were isolated from the pump price. the 19 study markets exhibited a high degree of correlation in gross product margin as a function of outlet throughput. This provided for market-bymarket and regional comparisons of key competitiveness indicators. and one by one. but also had significantly higher throughputs per outlet. When petroleum gross product margins were compared to their corresponding outlet throughputs. With the participation of several CPPI member companies. That such a relationship should exist was not surprising. rural markets. This was integrated with selected NRCan price data. were selected for a detailed review of outlet economics. With few exceptions. A wide range of petroleum gross product margins were evident. a distinct pattern was demonstrated: an inverse relationship between retail gross product margin and the average outlet throughput associated with that market. in order to identify market and/or regional competitive differences as potential issues or opportunities within the industry. several “outside variables” (product taxes. MJ ERVIN & ASSOCIATES vi .Comparison of Canada. proprietary 1995 operating data were collected on a total of 481 retail outlets in the selected market groups. to derive 1995 average petroleum gross product margins for each of the 19 markets.

000. This study showed that an average outlet net revenue in the 19-market study group was about $70.000 Halifax Montreal 0¢ source: MJ Ervin & Associates Although a comparison of petroleum gross product margins to their corresponding throughputs was shown to be an effective competitiveness analysis tool. These costs would include salaries of marketing representatives and management. and his personal labour investment. head office and regional office overheads. which represents the source of cash flow for three distinct purposes: • • dealer income/profit: the return or salary to the dealer.962 R2 = 0. an additional goal of this study was to undertake a comparison of outlet profitabilities.000. this study estimated that within the 19- MJ ERVIN & ASSOCIATES vii .000. sales processing.000.000. of which gross product margin and throughput are only two of several factors. supplier profit: after the above costs are allocated.6624 1.000 5.000 Volume (litres) 4.000 6.000 3. which reflects his investment in the outlet. etc.6634Ln(x) + 76. car wash) and outlet costs were factored into the market study analysis to derive a complete measure of average outlet income (in absolute dollars) in each region. the residual revenue is available as profit to be re-invested into retail operations. • Using market-determined rack prices as the basis for establishing petroleum gross product margin and its related revenue. corporate charity. not poor competition. Relationship of Gross Product Margin to Outlet Throughput (1995) 18¢ Peace River Thompson Chicoutimi Saint John Charlottetown Gaspé 16¢ Victoria Vancouver White Rock Calgary Regina Winnipeg Ottawa Sault Ste Marie 14¢ 12¢ Sioux Lookout 10¢ 8¢ 6¢ Nanton 4¢ Toronto 2¢ y = -4. and in major vs. smaller markets. and/or distributed to shareholders. and the higher prices (and margins) generally seen in these markets were a function of poor volume performance. supplier overhead: all operating costs of the supplier that are not directly associated with a single outlet.000 2.• Smaller markets performed as competitively as larger centres. revenues from ancillary operations (eg: convenience store.000. brand advertising.. Consequently.000.

000) $(350. rural market outlets were likely to be no more profitable: supplier overhead costs associated with maintaining rural. Although an objective measure of competitiveness is elusive. Where the actual corporate results of petroleum marketers showed 1995 profits from their downstream operations. or due to lower nonoutlet overhead costs which are likely achievable by regional and independent marketers.000) $(150.000) 1: Net Retail Petroleum Revenue 2: Ancillary Revenue 3: Outlet Costs 4: 95 Consolidated Retail Outlet Income source: MJ Ervin & Associates The study also showed that very little fundamental difference in outlet profitability existed between regions. for which this study had no specific data.000 per year. a variety of available data suggests that a state of vigorous competition exists in the Canadian petroleum marketing sector. $61.market study group. it was likely due to profitability in the refiner side of operations in the case of integrated refiner/marketers. distant outlets are clearly higher than those associated with concentrated urban markets. after allowing for estimated dealer profit and supplier overhead. Average Outlet Income (before marketing overhead costs) BC/PR $300. and that petroleum sales revenues alone.000 $($80) ON QU/AT Group A Group B All Study Mkts $(50. The study showed that the average urban outlet would experience a net loss without the contribution of ancillary operations. by all objective measures available to this study. at 1995 prices.000) $(250.000 $100.000 $50. Despite this difference.000) $(300. but that outlets in smaller (Group B) markets had higher outlet incomes than major (Group A) market outlets . The Canadian retail petroleum products industry.000 $150.000 vs.000) $(100. 1. Conclusions The study findings lead to a number of conclusions relating to the competitiveness of Canada’s petroleum marketing sector.000) $(200.000 $200. respectively.000 $250. were insufficient to cover outlet costs.$154. was shown to be strongly competitive: MJ ERVIN & ASSOCIATES viii . suppliers likely incurred a net loss on outlet operations in 1995.

A long-term decline in pump prices, when measured in constant and nominal dollars, was observed (Finding 10). This has not simply been a result of a decline in underlying raw materials costs; the very margins within which this industry operates has, over the long term, exhibited a diminishing trend (Finding 13). On a national level, in comparing Canada average (city) pump prices to those of the United States, Canadian prices have been at or below US prices in recent years, when taxes were excluded (Finding 14). In comparing several diverse markets, a consistent pattern of competitiveness emerged when comparing product margins to their associated average outlet throughputs (Finding 18).

These findings are likely in sharp contrast to a common public perception of this industry in general and price trends in particular. Virtually all of the competitiveness indicators examined in this study relate to price. As described in this study however, price is but one of four competitiveness “tools” available to marketers (product, place, and promotions are the other three). Closer examination of these strategic tools might yield additional insights into the nature of competition in this industry sector.

2. The economic relationship of the petroleum marketing sector with its related stakeholders is a complex one.
Critical to the overall success of this study was the development of a model which would create a common frame of reference for the considerable terminology that accompanies an industry as complex as Canada’s petroleum sector. The study presents such a model, which also serves to illustrate the interrelationships between the various stakeholders who ultimately receive the revenue from the sale of a litre of gasoline. This price/margin model illustrates that the various sector margins are a consequence of the prices at which feedstock or wholesale product is bought and then sold (Finding 1). The contrary notion that a given refiner or marketer is free to establish a price based upon a minimum margin requirement, is mistaken. Rack and pump prices are determined in competitive marketplaces, each with unique dynamics. The resultant margins, which at times can decline to very low or even negative values, are thus a reflection of the state of product supply, demand and other competitive factors existing at the time. In applying such a model to the retail petroleum marketing industry, it is important to understand that, while crude oil markets are considered global in scope and rack product markets are considered regional in scope, retail petroleum markets are considered local (municipal) in scope, since this is the effective range of consumer choice. This implies that the competitive dynamics pertaining to these retail markets can, and do, vary considerably from one population centre to another. Dealers were shown to have a variety of relationships with their supplier; well over half of all outlets in Canada operate as lessees or independents, and accordingly, the responsibility for deciding upon retail pump prices was shown to reside principally at the local dealer level (Finding 9).

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While some markets, particularly smaller ones, experienced higher than average pump prices, when the “outside” factors (tax, rack price and freight cost, for example) were rationalized, the resultant margins were found to display a distinct relationship with average outlet throughputs for each market. A much more accurate barometer of industry competitiveness would therefore be the rack-to-retail or gross product margin, measured against the average outlet throughput for that market. This would entail the tracking of not only pump price, but also rack prices and outlet performance, an exercise that consumers are unlikely to engage in, but not beyond the reach of any organization wishing to truly understand petroleum competitiveness issues.

3. Taxation is a significant factor in the price of retail gasoline, and in some markets, presents a competitive disadvantage to Canadian marketers.
This study’s analysis of NRCan urban regular gasoline prices shows that the tax content in a typical consumer’s gasoline purchase is about 50 percent (Finding 4). By contrast, crude costs accounted for roughly 34 percent (Finding 2), refiner margins accounted for 5.3 cents or 9 percent (Finding 5), and product margins accounted for 3.5 cents, or 6 percent (Finding 6) of the 1996 average regular pump price. Petroleum product taxes are levied at the federal, provincial, and in some markets, municipal levels of government. The latter two can vary considerably from one market to another, and are a predominant cause of inter-regional pump price differences (Finding 16). The measurement and analysis of the effect of petroleum taxation levels in Canada compared to other countries is well beyond the scope of this study, but given its magnitude, taxation as an element of public policy is an area worthy of additional research. Due to the localized nature of competition in the retail gasoline marketing sector, taxation differences between Canadian and US markets, or even between Canadian markets with differing tax structures, generally do not serve as competitiveness inhibitors. The demonstrated exception to this is in markets directly adjacent to nearby US markets, but even in such cases, these markets have managed to sustain a certain level of viability and competitiveness. Canadians nevertheless enjoy one of the lowest average gasoline taxes in the industrialized world, second only to the United States.

4. Pump price fluctuations can be an indicator of competition in the marketplace.
Demand for gasoline was shown to vary significantly according to the time of year, in a highly distinct, predictable seasonal pattern. Retail pump prices showed a corresponding seasonal pattern, reflecting consumer demand behavior (Finding 15). This relationship between price and demand was cited as the essence of competitiveness in the petroleum rack marketplace, which in turn is the principal

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driver of ex-tax pump prices. Viewed from this perspective, fluctuating prices are a strong competitiveness indicator (Finding 7). Retail pump price changes showed a close relationship to underlying rack prices, which in turn, showed a close relationship to underlying crude prices (Finding 11). Rack prices were shown to not significantly differ between major centres, further suggesting that a strongly competitive environment exists in the refiner sector as well (Finding 3). While price wars are undoubtedly an indicator of competitiveness, the absence of price war activity does not imply a lack of competitiveness. This study’s marginvolume model could detect no difference between price-volatile markets such as Toronto, and more price-stable markets such as Sioux Lookout, on the basis of price fluctuation alone. In fact, Sioux Lookout, a price-stable market, exhibited competitive traits typical of any of the study markets, when examined on the margin-volume model.

5. Retail gasoline marketing revenues, on a per litre basis, constitute a small portion of the retail pump price.
The pump price/margin model shows that in 1996, the Canadian retail marketing sector realized an average gross margin of 3.5 cents per litre on the sale of regular gasoline in a typical major urban market (Finding 6). This margin represents gross revenue (after wholesale product and freight cost) which, incorporated with ancillary revenues and outlet costs, is available to provide for all retail marketing operations including outlet costs, dealer income, supplier costs and profitability. This consolidated outlet revenue, when distributed these three ways (Finding 20), translates into supplier profits of an estimated one cent per litre of petroleum sales in the case of smaller markets, and a loss in the case of urban markets, which represent the majority of Canada’s population base. While these findings are somewhat qualified in terms of this study’s use of posted rack prices as the derivation basis, it can still be concluded that the petroleum marketing sector constitutes a small portion of the total retail pump revenue distribution.

6. Declining refiner and marketing margins, have caused, and have resulted from, intense competitive pressures in the downstream industry in general, and the marketing sector in particular.
Changing conditions in Canada’s downstream petroleum sector have caused retail pump prices to remain relatively flat since 1992, despite increases in tax content and crude costs (Finding 12), both of which are beyond the direct influence of Canada’s oil companies. A truly objective barometer of downstream industry influence on retail pump price lies in the measurement of margin, not price. Since 1991, the combined downstream (refiner and marketing) margin in Canada decreased by about 7 cents per litre (Finding 13). This trend has both resulted in, and has been a result of, several competitive strategies, including:

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in the long term these fluctuations are likely more reflective of market restorations. virtually all of the 19 study markets exhibited similar levels of competition. despite the predisposition of many observers to use them as such. Both the downward trend in margins. 8. and the associated industry initiatives which are ongoing in nature. most markets. 7. Thus. Although some smaller markets appeared to have higher gross MJ ERVIN & ASSOCIATES xii . based upon an assumed posted rack price. improving retail outlet performance through outlet rationalizations (closures) resulting in higher unit throughputs (sales volumes). Outlet throughput is a key determinant of inter-market pump price differences. Thus. Thus. assuming all other costs were unchanged.• • • improving production efficiency through refinery plant rationalizations (closures). crude costs. although this study provides comprehensive evidence of this. Nevertheless. and in turn. emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. When these margins were compared to their corresponding outlet throughputs. not excessive profits. a distinct pattern emerged: an inverse relationship between retail gross product margin and the average outlet throughput associated with that market (Finding 18). had petroleum margins which were commensurate with average outlet throughput for that market. but to increases in underlying rack prices. While these economics might appear to place this industry in a position of poor viability. It is likely that regional and non-refiner marketers operate with somewhat smaller overhead costs than those used in this study. from 3 cents per litre in Toronto to 14 cents per litre in Gaspé. serve as perhaps the most significant indicators of competitiveness in the downstream industry. profit margins in this sector can be stated to be in the order of 1 to 2 cents per litre in a “good” year. most outlets used in the 19-market study represent major integrated oil companies. Also. Also. Industry profitability is extremely sensitive to very small changes in pump price. Annual residual profits available to petroleum marketers is in the order of perhaps one cent per litre. pump price signs are particularly ineffective as a barometer of petroleum marketer competitiveness and profitability. if Canadian average pump prices were only one cent higher than they were in 1995. this industry sector would have realized profits of unprecedented proportions. these findings clearly show that pump price increases are ultimately linked not to increased profits. although pump prices in some markets can fluctuate by several cents per litre in the course of a week. Indeed. When plotted against the margin-volume model. regardless of size. A wide range of petroleum gross product margins were evident within the 19market study group. the rack price basis used in this study may understate actual revenues by about 1 to 2 cents per litre. That such a relationship should exist was not surprising.

and this study showed that gasoline prices were no exception. MJ ERVIN & ASSOCIATES xiii . The loss of employment represented by a station closure may be of some concern to smaller communities. there are three points to consider: • • In very small markets.5 million fewer litres of gasoline than a group A (major centre) station. average pump prices were relatively high. according to the margin-volume model. In suggesting this approach however. in order to build upon the findings in this study towards a full understanding of the dynamics at work. which should. • • At first glance. Low ancillary revenues Outlets in smaller centres received significantly less ancillary revenue than their group A counterparts.product margins than larger markets. more isolated markets are generally higher than in larger centres. • The particular competitiveness and viability issues facing smaller markets is an issue worthy of further study. reducing the number of outlets may also reduce the number of competitors. other factors exist which contribute to relatively high margins and prices. thereby improving petroleum volumes and ancillary revenues at the remaining sites. isolated markets face particular challenges: although found to be highly competitive. and therefore suffered an additional distribution cost disadvantage of about 2 cents per litre on average (Finding 17). the solution would be to encourage some dealers to exit the market. Some impediments to market exit may exist in the form of petroleum underground storage tank regulations which may present to the operator the option of pumping gas as the better alternative to decommissioning the site and possibly incurring prohibitive remediation costs. poor outlet throughputs were generally the predominant factor. This was due to three factors: • Low average outlet throughputs The average group B outlet sold approximately 1. The costs of most consumer goods in smaller. it would seem that if local government in smaller markets were interested in lowering pump prices. 9. Smaller. This created some economic pressure to sell product at a higher pump price. reduce pump prices. which could actually inhibit competition. While competitiveness in most smaller markets was shown to be as active as in larger centres. High distribution costs Smaller markets are generally further removed from their source rack point than larger centres. A full-serve retail gasoline outlet typically employs 3-5 staff. likely due to the different geographic and lifestyle differences that exist in small communities compared to major cities. in order to generate sufficient revenue to cover the outlet’s fixed operating costs.

were cited as examples of ways in which outlet petroleum sales are augmented by other revenues. This competition then. are an acceptable limitation on pure competition (Finding 8). as marketers find even more innovative ways to attract market share. Ancillary or non-petroleum revenue is described as an increasingly important feature of the retail gasoline marketing demography (Finding 19). possibly to the detriment of the consumer. A full analysis of the various features of the Nova Scotia and PEI regulatory structures. has seen a decline in pump prices relative to other Canadian markets. MJ ERVIN & ASSOCIATES xiv . and the traditional automotive service bay. car wash. sometimes below that of outlet operating costs. is well beyond the scope of this study. Recommendations This study advances two recommendations to enhance the existing competitiveness in Canada’s petroleum marketing sector. and the perceived effect on their markets. Government intervention into petroleum marketing is likely a poor alternative to market-based regulation.10. Also. direct regulatory interventions may have an adverse effect on competitiveness. and as such. characterized by narrow product margins and relatively flat pump prices. Convenience store. Retail ancillary operations are a critical element of petroleum price competition. 11. The federal Competition Bureau for example. many national and local environmental regulations exist for good cause. The 19-market study provides some insights into the issue of whether or not regulated retail gasoline markets serve to benefit consumers (Finding 22). Non-petroleum revenues at retail gasoline outlets will continue to gain prominence. will likely preserve a highly competitive petroleum market. The historical record is clear however: since deregulating pump prices. is viewed as an agency which exists to the benefit of industry and consumer alike. does not appear to benefit in consumer terms. Charlottetown. As these findings show. is both the cause and consequence of increased activity in ancillary operations. that where a healthy competitive climate exists. depressed petroleum revenues. the degree of price competition in the retail petroleum has in effect. as it does in the Canadian petroleum marketing sector. This study proposes rather. and likely others in Nova Scotia. This is not to say that all direct government intervention into marketing practices is certain to produce undesirable results. and in turn. This will be driven by the depressed petroleum product margins which currently exist in the petroleum marketing sector. under the current PEI regulatory structure. the Halifax market.

This study alludes to several potential study initiatives which go well beyond the objective of public awareness and may assist both the public and private sector policy and strategic directions: • Price/Margin Modelling: Development and adoption of a standard price model and associated terminology by industry/government. Research into the specific competitiveness issues of concern to consumers would provide valuable direction for groups conducting industry competitiveness research. and the nature of competitiveness influences. and the converse image held in much of the public domain. along the lines of the model used in this study. Regulatory Intervention: Historical and theoretical research into government regulation of petroleum markets. A recurrent theme arising from this study’s conclusions is the likely gap that exists between the demonstrably high level of competition within this industry sector. Industry and government have an opportunity to continue to work together in cooperative research similar to that which this study represents. using Canadian and foreign selected markets. Public perception measurement. 2. Ways in which this gap can be closed might include: • Ongoing third party evaluation of prices. in a simple format designed for consumers and legislators. This should be in the form of a quarterly summary of price trends and related measurements. • • MJ ERVIN & ASSOCIATES xv . petroleum marketing competitiveness. Individual companies within the retail petroleum industry have been reluctant to speak directly to the issue of gasoline pricing and competitiveness. This study might be used as the concept basis for a comprehensive annual update of price/margin trends and selected market competitiveness research. A regular comprehensive competitiveness evaluation.1. • • Would this enhance the competitiveness of this sector? It is felt that better public understanding of this industry’s record of competitiveness. Organizations such as the Canadian Petroleum Products Institute and the Petroleum Communication Foundation would therefore have an expanded role to play in commissioning and regularly disseminating the results of these recommended initiatives. Improve public understanding and awareness of competition in the petroleum marketing sector. would ultimately be reflected in carefully-considered public policy which serves to truly enhance. using Canadian and foreign selected markets. margins and competitiveness factors. Develop cooperative industry research into marketing sector competitiveness issues. Marketing Strategy Effectiveness: Research into price and non-price marketing strategies and their relative influence on consumer response. not inhibit.

Lack of understanding of this industry can lead to misguided policies which benefit neither the industry nor the consumer. MJ ERVIN & ASSOCIATES xvi . and regulators alike. • * * * Better understanding of this industry. using Canadian and foreign selected markets. Taxation: An analysis of taxation levels on industry and consumer behavior and as a tool of policy and revenue. is vital if Canadians are to put in place the structures that truly meet their social and economic needs. and in particular.• Small Market Competitiveness: Detailed research into small market outlet economics and competitiveness. by industry. and issues/opportunities facing such markets. A better comprehension of the true issues and opportunities facing this industry would be an important step in the right direction towards stable and effective policy. consumers. the possible effect of underground storage tank legislation as a potential impediment to market exit and as a competitiveness inhibitor.

and in comparison to the Canadian national average and nearby USA markets”.to provide a sound database upon which more effective policy decisions can be made.to determine the key factors which drive competitiveness in specific markets...to help the industry cope and to enhance competitiveness. or even communities within the same region. and regional differences which face the petroleum products retail industry. Industry Canada completed a Sector Competitiveness Framework (SCF) for the Canadian refined petroleum products (downstream) industry. Specific purposes of this study would be: • • • • “. leading to more effective policies and reduced uncertainty for future investment. competitive pressures from US and offshore refiners. Project Objectives The working group established as the primary objective of this study “.to analyze the rack to retail market and the market structure for refined petroleum products.. or petroleum marketing portion of the study. which comprise the “downstream” oil industry. ..Introduction Background Canada’s petroleum refining and marketing sectors.” MJ ERVIN & ASSOCIATES 1 . including a regional. provide a model for better understanding the nature of competition and pricing economics within the petroleum marketing sector.” An additional study objective was that an assessment of the viability and competitiveness of regional markets be made.. . and Industry Canada was convened to undertake this project. and that issues and challenges be identified so that conclusions and recommendations can be made “. This would have several advantages: it would objectively explain the sometimes significant pump price differences that can exist between regions.. to name a few. and . and MJ Ervin & Associates was selected to undertake the “rack to retail”... In 1995. face a number of challenges: a poor public image.to draw comparisons with nearby USA markets. and in the process.. and a challenging array of potential environmental initiatives.to better understand the competitive opportunities and challenges. The objective of this project was to improve understanding of the issues affecting the long term competitiveness of this industry. the Canadian Petroleum Products Institute (CPPI). region by region across Canada... more detailed economic model of the industry from the rack price point (eg: the refinery plant) to the retail pump. A working group represented by Natural Resources Canada (NRCan). The SCF laid the foundation for supplementary studies..

in Appendix I. Study Overview This study is in five parts: Part A: Pump Price/margin Model presents a conceptual model for understanding the interrelationship between various subsectors of the petroleum industry. The study does provide comparisons with US markets on a national level of detail.The study meets these objectives. due to the considerable data gathering difficulties that such an approach would entail. margins and related implications for market competitiveness than can simply be provided by existing public-domain data. or which have a specific meaning in the context of this report. Many of the findings in this report are presented in graphical form. and the effect of competitiveness on each subsector. It also relates consumer demand patterns to pump price fluctuations. Report Format and Conventions • • • • We have defined terms which may be unfamiliar to the reader. margins and demand patterns over the past several years. Supporting data to these charts can be found in Appendix II. and a foundation for effective policy development. Findings are stated in bold and are summarized in part E of this report. Part D: Selected Market Study presents the findings of a diverse 19-market study. through a multi-faceted approach. Part B: Retail Structure serves to provide a general overview of the retail gasoline sub-sector in terms of infrastructure. all prices and margins referred to in this document are stated in nominal Canadian dollars or cents (ie: not adjusted for inflation). an examination of a diverse array of markets in order to determine the degree of dissimilarity or similarity between them. from which some important findings are made. • Part E: Conclusions and Recommendations summarizes the study findings and. undertaken as part of this project to: • make a more detailed examination of price. Specific comparisons of specific Canadian and US consumer markets were not made. Part C: Historical Trend Analysis provides an overview of prices. and in order to provide insights into the range of competitive dynamics that can exist. Unless otherwise stated. it provides a comprehensive tool to understand the dynamics of this vital and complex industry. presents conclusions and recommendations which arise from the study findings. Acknowledgments Three organizations were of considerable assistance in the development of this study: MJ ERVIN & ASSOCIATES 2 . Ultimately.

The Canadian Petroleum Products Institute.. chaired the steering committee. Natural Resources Canada. These included: Canadian Tire Petroleum.• Industry Canada. and Shell Canada. Ontario Ministry of Environment and Energy. Ministère des ressources naturelles du Québec. Petro-Canada. Suncor Inc. including Ultramar Canada. through the involvement of Cindy Christopher and Jack Belletrutti (now with CPPI). assisted in securing the support and participation of member companies in the selected markets phase of the study. and Industry Canada.. Petro-Canada. • • Several organizations participated in two key review sessions. for their assistance. NRCan. through Bob Clapp. several companies made a significant contribution by providing us with retail outlet operating data used in the selected market study. MJ ERVIN & ASSOCIATES 3 . Shell Canada... We gratefully acknowledge these companies. Finally. and provided critical guidance and feedback at several key stages in the process. through Maureen Monaghan and Huguette Montcalm. CPPI. Suncor Inc. and their 481 retail associates whose outlet data was used in our analysis. Consumers Association of Canada. Environment Canada. Imperial Oil Ltd. facilitated some of the data gathering needs of this study. and also participated in the steering committee.

And. principally of motor gasoline. It is this particular feature of petroleum products . and serves to explain several factors that together determine retail gasoline prices at any given time. multifaceted industry. Yet. or taste. To understand competitiveness and pump price economics in the Canadian retail gasoline sector requires a clear understanding of the interrelationships between the principal stakeholders who ultimately share the revenue from the sale of a litre of gasoline. In fact. public attention towards the competitiveness of this industry is most focused during a time of gasoline pump price increases. but simply.Part A Pump Price/Margin Model Although Canada’s petroleum industry is a vast. unlike many consumer products. the particular quality of gasoline which is of most interest to consumers is not its colour.which is used by many groups and individuals to assess the competitiveness of the petroleum industry. These relationships can be modeled. as they are in Figure 1. The interface between each of the stakeholders in this model is defined primarily in terms of the price at which product is transferred (sold and then bought) from one sector of the industry to its neighboring sector. An Overview of the Model Figure 1: Pump Price / Margin Model NOT TO SCALE PUMP PRICE TAX DOWNSTREAM MARGIN MARKETING MARGIN REFINER MARGIN UPSTREAM PRODUCT MARGIN FREIGHT EX-TAX PUMP PRICE RACK PRICE CRUDE PRICE MJ ERVIN & ASSOCIATES 4 . texture.price . most Canadians relate to this industry in one specific way: as consumers. This price/margin model thus creates a common reference for understanding the economics of retail gasoline. as this study shows. pump price changes as displayed on the street sign provide no real insights into the factors which drive competitiveness in this industry. its price.

evaluating competitiveness is therefore a partly subjective process. Before examining each of the model elements.Many of the terms introduced and explained in this section are used extensively throughout this study. This section represents the basic model of pump prices and margins shown in Figure 1 not as a fixed view of what pump prices and margins “should be”. Gross margin is simply the difference between two price points. So defined. Each margin is quantified by its defining prices. this study’s use of the term relates to gross margin. consumer perspective. but as a dynamic model in constant motion: as competitive forces act to move various price points up and down. From an industry perspective. and in fact inextricably related. Competitiveness: The Pump Price Model in Motion EX-TAX PUMP PRICE RACK PRICE CRUDE PRICE One of the key questions this study seeks to answer is “Is the gasoline marketing (ie: rack to retail) sector truly competitive?” As there is no standard. it is important to define the term “margin”. any operating expenses must then be considered before making any determination of profits. A consumer however. 1 The revenue from a petroleum sale filters down to the principal stakeholders in various ways. While both perspectives are valid. these stakeholder revenues are derived from the revenue from the retail sale. this study examines competitiveness from the latter. “competitive” may be synonymous with “viable”. A General Definition of Competitiveness Since understanding and measuring downstream industry competitiveness is a general goal of this study. objective measurement for competitiveness. The revenue from the consumer purchase of a petroleum product (such as gasoline) is split among four key sectors.or margin . each essentially taking a share1 . (implying that the stated margin represents net income or “profit”). is more likely to equate the term with “value for money”. an understanding of the term itself is necessary. MJ ERVIN & ASSOCIATES 5 . Ultimately however. margins are squeezed or expanded accordingly. While this term is often associated with the phrase “profit margin”.from the total pump revenue. gross margin represents revenue only. typically the retail price (the price at which the product is sold) less the wholesale price (the price a marketer pays for a product).

provide some means for comparing the type and to some extent. The actions by business rivals place an upper limit on the prices a firm can charge for its products. and unless care is taken to use the word precisely. a universally acceptable definition of competitiveness is elusive.Unlike many business or economic concepts. such actions by rivals continuously pressure a firm to lower its costs in order that the highest prices the market will permit it to charge enable it to earn a sufficient return of investment to attract investors. competitors can either restore higher prices or reduce costs. To achieve this. This market condition requires that competitors consciously seek to attract business away from each other by price and other means and in turn. They are sources of creative destruction by which monopolies or inefficiencies are destroyed and new entrants and greater efficiency are encouraged. improving efficiencies. reducing costs. this usually requires a reasonable number of competitors. Competition can only be sustained therefore. and the entry of new competitors and new ideas. one must ask how marketers compete. as competitors seek to attract market share through lower prices. it can frustrate communication and obscure analysis. Inevitably.. 1986: “Competition may mean very different things to different people.. and at least one of the competitors wishes to improve its revenue by gaining a larger share of the market (profit motive). is the only real option in the long term. if market conditions allow a sufficient number of players to remain profitably engaged. in the sense in which it is something in the public interest. in order to maintain some level of brand variety. Conditions for a competitive market can be deemed to exist when: • • more than one.” Price Competition in the Oil Industry In order to assess competitiveness. Since a competitive market effectively limits the price option. Accordingly.Competition means therefore an effective functioning of markets which promotes and requires rivalry amongst competitors for the business of consumers. represents a process by which prices are set. and ideally many entities offer the same or similar products (brand variety). This study therefore attempts simply to identify and illustrate competitiveness indicators which together. the degree of competition within a market. Simply put.” “. the result of price competition is reduced profit. Price competition. A useful explanation of competition in the petroleum marketplace was advanced by the Restrictive Trade Practices Commission report “Competition in the Canadian Petroleum Industry” in May. An effective functioning of markets also permits smaller competitors to expand if they meet the test. or in other words. Technological change and innovation are the large levers of competition in industry. any attempt at arriving at an objective measurement of competitiveness would be subject to considerable debate. In competitive markets the prices of the various competitors inevitably tend toward the same levels because all available cost-savings techniques will be adopted by all the (surviving) competitors. More importantly. competitive activity can be observed when a competitor alters one or more of MJ ERVIN & ASSOCIATES 6 .

in turn determined by competition on a continental (Rack Price) or a local (retail pump price) scale. Place. and the downstream industry. Irving. or four P’s: Product. and as will become more evident in this study.the variables at their disposal. In fact. the geographic scale of competition is an important consideration. The dynamics of upstream and refiner competition are major studies in themselves. 4th Ed. Basic Marketing: A Managerial Approach. commonly known as the “marketing mix”1. Ill. and Promotion. which in turn defines a proper market price. whose main activity is the exploration and development of crude oil. so a brief description of these. most Canadians relate more in terms of retail gasoline marketing. and are generally known as integrated oil companies. 1960) 2 Although distinct. • Thus described. where retail gasoline dealers compete on a local scale to sell gasoline to the motorist. in rack markets. Jerome McCarthy. but a retail dealer in Toronto is more concerned with the competitive threat posed by other dealers within perhaps a 1 to 2 kilometer radius. which in turn defines the margins. some organizations have operations in two or more of these markets. whose main 1 E. which focuses more on the infrastructure and mechanisms which promote or inhibit competitiveness at the retail level. Given the commodity nature of petroleum products. While those who reside in oil producing regions such as Alberta often think of the oil industry in terms of crude oil and natural gas exploration and production. and are beyond the scope of this study. where upstream oil producers compete on a global scale to sell crude oil to petroleum refiners. 1971).: Richard D. Price.. New York. and in retail markets.44 (1st Dec. MJ ERVIN & ASSOCIATES 7 . Finding 1: Refiner and Marketing Margins are a consequence of their defining prices. and a comprehensive description of retail price competition follows: Canada’s Petroleum Industry: Upstream and Downstream The “oil industry” can mean many things to many people. p. competition in the crude and rack markets deserves some mention. competition acts to self-regulate prices in three distinct marketplaces2: • • in crude oil markets. A refiner in Toronto may well compete with a refiner in Buffalo. the most effective of these as a competitive tool is price. (Homewood. the raw material from which gasoline is made. is false. particularly in the crude (upstream) industry and refiner sector. It is also important to stress that the market ultimately sets rack and retail pump prices. the “oil industry” consists of two distinct industries: the upstream industry. The converse notion that the industry establishes a “should be” margin. Within the broad context of the oil industry. Nevertheless. where petroleum refiners compete on a continental scale to sell refined petroleum products (eg: gasoline) to retail marketing organizations.

which finds and produces crude oil . production. and refinery production methods. and transportation of crude oil to the refinery plant. it is probably sufficient to say that. our crude prices rise and fall according to price benchmarks established far beyond our own shores. its marketing operations). MJ ERVIN & ASSOCIATES 8 . While this study focuses on the downstream industry (and in particular. rather than a fixed value. this study uses a fixed percentage of the Edmonton Par crude price as a standard assumption. consequently. It is difficult to precisely quantify the upstream “content” in the price of a litre of gasoline. alongside major producing countries such as Saudi Arabia. due to variables such as crude quality. which it does on a continuous basis. that is to say. and in the open market structure that exists in Canada. and the delivery and sale of these products to the consumer. which gives an accurate portrayal of month-to-month crude price fluctuations. drilling. gasoline grade. implying that it fluctuates. Within the scope of this study. Competitiveness in Crude Markets The nature or extent of price competition in the crude oil marketplace is a subject of considerable debate. as a minor contributor to the world crude supply. in several commodities trading centres around the world. In providing historical comparisons of crude to rack/pump prices. a brief discussion of its relationship with the upstream industry is useful: Upstream Industry CRUDE PRICE UPSTREAM The starting point of the pump price model is commonly referred to as the upstream industry. Canadian producers are known as “price takers” rather than “price setters” of crude prices. Although this industry is not the focus of this study.the raw material from which gasoline is made. Canadian producers must compete to sell their production to refiners. from the exploration for potential crude or gas reserves. it is important to examine its relationship with its neighboring downstream industry. Crude oil is a commodity which is traded in a global marketplace. Canadian producers have virtually no influence over world crude prices. Infrastructure The upstream oil industry encompasses a broad range of operations.activity is the refining of crude oil into petroleum products. The upstream industry’s crude price is represented in Figure 1 as elastic.

as a factor of the regular gasoline retail pump price. crude is only one of several factors that influence pump prices. and from this feedstock. and some attention to the refiner sector is therefore given here. and lubricants. From this revenue.While some suggest that the price of gasoline should rise and fall exactly with the crude price. Petroleum Refining DOWNSTREAM MARGIN RACK PRICE REFINER MARGIN CRUDE PRICE Within the downstream oil industry there exists two distinct sectors: refiners. Infrastructure The petroleum refiner sector represents the manufacturing stage of the life cycle of petroleum products. drill for. A modern refinery is a sophisticated work of engineering. put simply. is the provincial government. one of the key attributes of this sector is the very high capital cost of a refinery plant facility: roughly one billion dollars in today’s dollars. and marketers who. buy refined products from the refiner and sell them to the end-use customer.1 cents per litre. The focus of this study is on the marketing sector of the downstream petroleum industry. heating fuels. is called the refinery. who manufacture petroleum products from crude oil. its predominant feature is the plant facility which. diesel. maintenance. which in oil producing provinces such as Alberta. In addition. involving energy. personnel. and hopefully realize some production. This sector acquires crude oil. As is typical of many manufacturing organizations. and pay out royalties to the resource owner. MJ ERVIN & ASSOCIATES 9 . in the petroleum sector. day-to-day plant operations are cost-intensive. was 19. or roughly 34 percent of the pump price. Although a description of the process of turning crude oil into gasoline is outside of the scope of this study. oil producers must explore for potential reserves. manufactures a range of refined petroleum products including gasolines. Some discussion of the interface between refiners and marketers is essential to a full understanding of the marketing function however. and numerous safety and environmental safeguards. As a general measure: Finding 2: 1996 average crude price.

some clear competitiveness indicators exist. indicative of a competitive wholesale rack market. Canadian refiners produced only sufficient product to supply their own networks of retail facilities. While refineries are always rack price points. This margin provides for plant operating costs as described above. If for example. they use rack price as their basis. The existence of rack price in a given market is not of itself. not the refiner sector. The Bloomberg Oil Buyers’ Guide™ currently lists twenty Canadian rack points. only rack price information is readily available in the public domain. 2 MJ ERVIN & ASSOCIATES 10 . In fact. the gross refiner margin is elastic. refiners sell their product under a variety of arrangements. there would be little or no market-driven competitiveness in the refiner sector.Price/Margin Model Elements For simplicity. reflecting the cost of transporting the crude from the producing region to the refinery plant. which can be broadly categorized as follows1: • • • rack price . the relative competitive strength of any given rack market is difficult to assess. this model only uses the benchmark crude value. On a national basis however.the price charged for immediate supply on an “as available” basis. representing major Canadian population centres. Since both crude and rack prices fluctuate according to market forces. For a competitive rack market to exist. being squeezed or expanded between these two price points. and accordingly. For simplicity. many of which do not have integral refineries. In simple terms. as this price point exists within the marketing sector.the price charged to a non-refiner marketer (or other sales channel customers) usually under the terms of a long-term supply agreement. external measurement of the current market value of a particular petroleum product. as they relate to negotiated. confidential terms between the seller and specific buyers. Contract and transfer prices are not openly shared. contract price . Wholesale volume data is not readily available on a market-specific basis. In fact the refiner typically pays a higher price than the benchmark crude price. less the price at which it bought its raw material2 (rack price minus crude price). Historical data is readily available for crude and rack prices through publications such as Bloomberg Oil Buyers’ Guide™. and a return on the considerable capital investment in the plant facility. Of these three refiner prices. which may cause Gross Refiner Margin to be slightly overstated.this is the “internal” price charged by a refiner to the marketing arm of the same company. the pump price model uses the term “rack price” to refer to the refiner’s sale price of refined petroleum. which provides an independent and objective determination of rack-based gross refiner margin. since the market-driven rack price provides an objective. transfer price . the gross refiner margin is the price at which the refiner sells its refined product. 1 Dealer Price is not included here. Although contract and transfer prices are distinct from rack price. rack prices also exist at many nonrefining centres where there is sufficient wholesale demand for petroleum product. but with no material effect upon the Gross Product Margin derivation. a considerable volume of petroleum product must actually trade using rack price as the transaction basis.

but with their US and European counterparts. as there is no obvious market mechanism to regulate its setting. to major industrial consumers. In practical terms. who themselves do not refine petroleum products.Competitiveness in the Canadian Rack Marketplace A great deal of Canadian refinery output is sold outside of the refiner’s own marketing infrastructure . or transfer price. for example. would produce better than expected refiner income. 1 Based on Octane Magazine Retail Outlet Survey data. In practice. These independent marketers naturally seek to purchase their product at the lowest available cost (rack price or a negotiated contract price). even overseas. many US and European refineries are in practice. MJ ERVIN & ASSOCIATES 11 . petrochemical producers. The mechanisms that drive rack prices are more fully discussed on page 36. or close to. potential sources of wholesale product supply for most Canadian non-refiner marketers. and in the case of gasoline. and which supply petroleum to about one-third of all retail outlets in Canada1. this limits a marketer to a relatively short range (perhaps 1. from any one of several regional refiners. There is no “windfall” profit in setting an unrealistic transfer price: a higher than market transfer price. market-driven rack prices. but where pipeline or marine fuel terminal facilities exist.000 km) for overland truck transport. to so-called “independent” petroleum marketers. The range of potential refiner sources from which a marketer can choose is largely dependent on the transportation costs involved in bringing the product from the refiner’s rack point (ie: the bulk distribution terminal) to the destination market. most refiners also participate in the marketing and retailing of petroleum products. wholesale refined product is bought and sold across very large distances. who compete for a share of this demand. In examining the structure of the Canadian refiner sector. rack prices are also demonstrably competitive in the sense that there is historically a high degree of price uniformity between any two rack points in North America. in order to maintain realistic accountabilities within each of the two sub-sectors. With a large proportion of the Canadian population within a few hundred kilometers of the United States and/or able to receive marine supply. but at the expense of marketing income. integrated refiner-marketers establish transfer prices at. Integrated Refiner-Marketers In Canada. As shown in Figure 15 (page 35). market-driven Rack (wholesale) pricing of petroleum products. In these cases of so-called “integrated” refiner-marketers. due to the relatively small transportation cost. it follows that: Finding 3: The infrastructure of the Canadian refiner sector provides the necessary conditions required for competitive. the question of the internal selling price. Canadian refiners must therefore be price competitive not only with each other. arises.for example.

Product is either delivered to the customer by the supplier’s (or an associate of the supplier’s) tank truck. as detailed in Table 1: • Direct Sales to major customers who generally purchase several million litres of petroleum product annually. or in the case of cardlock facilities. each with its own distinct infrastructure. this study focuses upon price and competitiveness factors that relate to retail gasoline marketing. • • MJ ERVIN & ASSOCIATES 12 . which “sets” the retail price of gasoline. trucking. It is this sector which has direct contact with the petroleum consumer and it is this sector.Petroleum Marketing DOWNSTREAM MARGIN EX-TAX PUMP PRICE RACK PRICE MARKETING MARGIN PRODUCT MARGIN FREIGHT The petroleum marketing sector represents the final stage of the pump price model. this is only one (albeit an important one) of several sales channels that exist within the petroleum marketing sector. and aviation. Retail Sales to the domestic motorist. media and regulatory attention. Direct sales consumers do not use the infrastructure associated with the refiners’ own brand. Marketing operations within this sector can be broadly classified into three elements. gasoline price and competitiveness issues attract considerable public. including mining. principally into commercial trucking operators’ vehicles. the most recognized element of the downstream oil industry. Wholesale Sales to a wide variety of customers. as a popular and relevant “window” on the petroleum marketing sector. product is sold from a central facility. and who essentially deal directly with the refiner. farming. in the minds of many consumers. Within this industry sector. For this reason. and purchase at or near the established rack price. home heating. Infrastructure Although most consumers associate petroleum marketing with retail gasoline stations.

MJ ERVIN & ASSOCIATES 13 . Sales of petroleum products (principally gasoline) through retail gasoline outlets. Sales of home heating fuels to residential furnace oil customers. as discussed. Sales to non-refiner petroleum marketers. Bulk Sales Home Heating Aviation RETAIL The remainder of this study provides a detailed examination of the retail petroleum products industry in general. typically at the “rack point”.500 retail gasoline outlets in Canada. Some larger petroleum marketers also operate a network of retail outlets which are identified with a different brand than the primary.300 bulk sales outlets in Canada. such as product transport and/or storage. in smaller centres. There are over 1. In major centres dedicated Home Heat centres provide this service. as principal elements of petroleum marketing operations. and usually supply customers by delivery to the customer’s own storage tank. often delivered by pipeline or ship/barge. for example. at a negotiated contract price. The name “cardlock” refers to the coded access card which the customer uses to activate the fuelling pump at the outlet. using delivery tank trucks. according to the contractual relationship between the supplier and the dealer. and regular gasoline in particular. Sales to major industrial accounts. usually involving some aspect of the marketing sector infrastructure. Sales to spot buyers at posted rack price. which primarily serve long-disttance truckers and commercial delivery and haulage operators. Primary Brand Second Brand Retail gasoline sales through the principal brand name associated with the supplier. Sales of petroleum products through bulk sales outlets. Cardlock Sales of petroleum products through a network of consumer-operated fuel dispensing facilities. which is generally less than the rack price. These outlets usually have considerable inventory capacity. There are over 850 cardlock outlets in Canada. heating fuel delivery is an integral part of a bulk sales outlet. to the aviation fuel consumer.Table 1: Downstream Sales Channels Sales Channel DIRECT SALES Major Industrial Spot Rack Contract Supply WHOLESALE Infrastructure Description Sales to major accounts. by delivery tank truck. Sales of aviation fuels at major and secondary airports across Canada. Sales to commercial and industrial accounts by the wholesale marketing sector. to the motorist consumer. Direct sales generally do not involve any marketing sector infrastructure. There are about 16. one final element of the pump price model must be reviewed. Before examining this sector in detail. Retail outlets are operated in a variety of modes.

typically made up of: • • • • a ten cent per litre federal excise tax. the tax content of the petroleum price is essentially a pre-determined. The petroleum industry acts as a collector of these taxes. A three-cent drop in pump price.3 in Quebec) drop in the tax content. which amount to 28. and seven percent GST. 1 Due to the application of GST (and in Quebec. 1995 product taxes on retail gasoline alone represented approximately 9 billion dollars in federal and provincial government revenues. As part C of this study shows. MJ ERVIN & ASSOCIATES 14 . this decrease is reflected in a reduced gross product margin the tax content stays essentially the same1.2 cent (0. tax content does fluctuate somewhat with pump price changes. municipal taxes.6 cents per litre (Canada 1996 10-city average). PST). provincial sales tax. in a small number of markets. stable amount.Taxation on Petroleum Products PUMP PRICE TAX EX-TAX PUMP PRICE Unlike gross product margin. or roughly 50 per cent of the pump price. the tax content of retail gasoline in Canada has increased steadily over several years. for example. regardless of market conditions. Table 2 shows the provincial tax content for retail gasoline. If the pump price decreases for example. would include a roughly 0.

0 9.3 10. All Quebec gasoline sales are subject to a 15.6 3.0 10.0 10.2 24.0 10.0 11.0 10.5 cents and 4.7 18.0 10. 1996 (City)Province BC (1) Alberta Saskatchewan Manitoba Ontario Quebec (2) New Brunswick Nova Scotia PEI Newfoundland Yukon NWT Canada Ave.0 10.5 cents was introduced in the Montreal and surrounding area in 1996.6 3.0 10.6 22.8 note 1 note 2 An additional tax of 1.0 15.0 10.0 16.0 3.6 3.9 3.0 10.4 3.0 10.0 10.1 25.5 Total Tax 24.3 20.0 3. MJ ERVIN & ASSOCIATES 15 .0 28.0 10. Quebec pump taxes are reduced by varying amounts in certain remote areas and in markets within 20 kilometers of provincial or US borders. An additional pump tax of 1.0 cents is charged in the greater Victoria and Vancouver areas respectively.0 28.7 13.6 3.5 3. plus a 6.2 cent per litre pump tax.3 Federal Excise Tax 10.5 12.2 10.7 3.2 24.3 27.7 30.0 GST content (7% of pump) 3. Provincial Tax 11.5 6.5% sales tax applied to the GST-inclusive pump price.5 14.1 32.Table 2: Taxes on Regular Gasoline on December 31.0 27.0 14.0 4.6 25.8 4.

3 percent of the average regular gasoline posted pump price. namely the dealer’s costs and income. The residual. was available for product marketing operations. or 34 percent of the pump price.3 ¢ CRUDE PRICE source: Natural Resources Canada • • • • Tax accounted for 28. Refiner operations realized 5. Figure 2: 1996 Average Prices/Margins . and ancillary operations. or 50.6 ¢ EX-TAX PUMP PRICE RACK PRICE DOWNSTREAM MARGIN MARKETING MARGIN REFINER MARGIN UPSTREAM PRODUCT MARGIN FREIGHT 3.8 ¢ TAX 28. Figure 2 integrates the pump price model with NRCan 1996 regular gasoline product prices (10-city average). and the retail gasoline sub-sector in particular. Pump Price/Margin Model: An Integrated View Having reviewed each of the four key pump price/margin model elements. this section provides a view of the Canadian petroleum marketing sector.5 cents per litre (after freight cost). based on regular unleaded gasoline. 3. or 9 percent.2 ¢ 24.3 ¢ 28.Part B The Structure of the Retail Petroleum Products Sub-Sector While part A of this report established a conceptual framework of Canada’s petroleum industry. the brand supplier’s costs.1 cents per litre. It also provides an overview of the industry in terms of several infrastructure parameters. to derive a representative value for regular gasoline gross product margin in Canada. and potentially.1 ¢ 5. Upstream operations realized 19.Regular Unleaded1 NOT TO SCALE PUMP PRICE 56.4 ¢ 19. including retail outlet distribution. some profit return for the shareholder.6 cents per litre. MJ ERVIN & ASSOCIATES 16 .5 ¢ 0. This 1 Prices and margins reflect a Canadian 10 city average.3 cents per litre. operating modes.

The gross marketing margin. three key findings can be stated: Finding 4: Finding 5: In 1996. Based on the 1996 data. The marketing sector then. See page 10 for further explanation.3 cents per litre. is usually the gas station. for example) is sold/transferred at the current rack or transfer price. Bloomberg rack price values were used as the assumed wholesale price. which in the case of retail gasoline. It is this sector which provides the entire infrastructure for bringing refined petroleum products from the refinery plant facility to the ultimate end-use consumer. is the second of two elements of the downstream oil industry. In referring to marketing margins and product margins. and rack price. this is seen as a “non-core” business. was 3.3 percent of the average urban price of regular gasoline in Canada.5 cents per litre. or “rack to retail” margin. Freight MJ ERVIN & ASSOCIATES 17 . is defined by the marketdriven price points of ex-tax pump price. In 1996. This margin represents the revenue which provides for two key operations: • Freight: Freight (or distribution) is the transportation of petroleum products from the rack or refinery point to the final point of sale. Finding 6: Marketing Sector Overview DOWNSTREAM MARGIN EX-TAX PUMP PRICE RACK PRICE MARKETING MARGIN PRODUCT MARGIN FREIGHT Once the refiner has completed its work. Freight cost does not typically fluctuate.gross product margin represented 6 percent of the Canadian average regular gasoline pump price. petroleum taxes accounted for 50. as part C will describe. In 1996. the finished product (gasoline. and it is depicted in Figure 1 as a fixed cost element. and is then transported to the retail outlet. Both refiner and marketing margins have been in decline over the past several years. it falls into the domain of the marketing sector. the average Gross Product Margin available to Canadian petroleum marketers to provide for all operating costs and profits on the sale of regular gasoline in a typical urban market. was 5. Although many petroleum marketers conduct their own freight operations. As the product leaves the refinery plant. and is often out-sourced to third-party common carriers. the average Gross Refiner Margin available to Canadian petroleum refiners to provide for all operating costs and profits on the manufacture of regular gasoline.

together with gas station dealers. Unlike most other retail enterprises however. storing and dispensing a product such as gasoline adds considerably to the operating cost. Gross product margin is therefore defined as gross marketing margin less freight cost.5¢ Product Operations Freight 0.3¢ 3.5 cents per litre in 1996. as it excludes the “outside variables” of tax. Modern pump and underground tank installations have greatly reduced the environmental and safety concerns associated with petroleum products.6¢ Refiner Operations 5. and is therefore a poor comparative tool. and upstream/refiner margins. an average gross product margin for regular gasoline in a major Canadian city was 3. • Product sales: Within this domain. but can be as high as 3 to 4 cents in markets more distant from the refinery point: this partially explains why some small. This is a particularly useful measurement in comparing retail gasoline markets. Midgrade and premium grades (which have a higher octane content) represent 5% and 15% of MJ ERVIN & ASSOCIATES 18 . As represented in Figure 3.costs are generally less than one-half cent per litre in most major Canadian cities.8¢ Pump Price) Upstream Operations 19. typical of any retail business. Figure 3: 1996 Average Regular Gasoline Margins (56. Posted pump price includes all of these variables. as it represents 80% of all retail gasoline sales.000 per outlet. but at an average cost of over $200.3¢ source: Natural Resources Canada The determination and comparison of gross product margins in selected markets is a key objective of part D of this study. which are typically close to a wholesale rack point.1¢ Tax 28. petroleum marketers. freight. rural markets experience higher pump prices than do larger centres. Grade Differentials Most of the Canada average product prices cited in this study refer to regular unleaded gasoline (RUL). incur a variety of costs.

and Promotion. Place. Place Typically. A portion of the market certainly responds to this type of competitive strategy. In the 1960’s and 1970’s this type of competitive activity was evident in the retail gasoline sector. Today. seasonal blends.: Richard D. commonly known as the “marketing mix2. 2 E. will ultimately purchase based on price. Price. (Homewood. a number of factors preclude this type of strategy. marketers compete for the consumer’s choice of transportation energy (for example. one must ask how marketers compete. Competitiveness in the Retail Gasoline Sub-Sector Retail Competitive Practices and Indicators A retail gasoline marketer competes at many levels: At a general level. Higher octane grades are more expensive than RUL. Prices for midgrade and premium grades are established in the same way as RUL prices: through competitive activity. 1 Diesel is another petroleum product sold at many retail outlets. Although revenue from this product is factored into the study market economics in Part D. Simply put. Ill. and accordingly. and the price difference between these grades and the RUL price is referred to as the grade differential. • Product In the past decade. Examples of competitiveness relating to place include: • opening new or upgrading existing facilities. propane vs. and 9 cents per litre for premium gasoline. Jerome McCarthy. expanded product/services offerings such as convenience items. marketers have attempted with some success to differentiate their product offerings from other brands.). 1971). Basic Marketing: A Managerial Approach.. etc. 1960) MJ ERVIN & ASSOCIATES 19 . The grade differential varies somewhat from city to city. or when comparing price levels between markets. Irving. Specific competitiveness indicators relating to product would be: • • • introduction and promotion of gasoline grade features such as octane content. Environmental concerns and associated costs have dictated greater selectivity in developing new sites. and confines itself to the more specific (and popular) issue of brand competition for retail gasoline.” or four P’s: Product. RUL prices are therefore most often cited when relating historical price trends. additives. This study does not examine such a broad issue however. it represents a very small percentage of total retail petroleum sales. competitive activity can be observed when a marketer alters one or more of the variables at their disposal.retail gasoline sales respectively1. but most consumers view gasoline as a commodity. as gas stations proliferated. Price competition has forced marketers to optimize outlet revenue. gasoline). rather than the most places. but in 1995 was typically 5 cents per litre for midgrade.44 (1st Dec. In order to measure competitiveness. marketers compete to be represented in as many and/or the best locations as possible. competitive strategy of this type focuses heavily on selecting the best place. page 24). p. Today. 4th Ed. This has resulted in a decline in the number of retail outlets in the past two decades (Figure 5.

• • closure of non-viable outlets. Promotion In the gasoline retailing sub-sector. and due to the already slim margins available to marketers. gasoline is a commodity. Price Uniformity and Volatility As the degree of price uniformity and volatility in the retail gasoline sub-sector is often perceived as synonymous with its competitiveness. due to the largely commodity nature of petroleum product. in fact it is indicative of some consumer perception that one brand of gasoline is essentially the same as the next. caused by price competition.contrary to some public perception. • • • While examples of all of these indicators are abundantly in evidence. volatile prices . In this context. and therefore “trades” within a relatively narrow price range.that pump prices are almost universally displayed on highly visible outlet billboards is indicative of the importance of price as a key selling feature. This study presents an extensive historical and comparative analysis of pump prices. Examples of promotional competition are: • • • brand identity gasoline discount coupon. Consequently. Promotional activity seems to have decreased in the past few years. • Price In most markets.while uniform pump prices are sometimes cited as evidence of industry collusion. price clearly remains the predominant competitive tool used by Canadian gasoline marketers. fluctuating pump prices are a significant indicator of robust competition among marketers. MJ ERVIN & ASSOCIATES 20 . price has proven to be the most widely used competitive tool by gasoline marketers. promotion strategies generally attempt to provide the consumer with added value without resorting to pump price reductions. it is useful to address some of the general competitive mechanisms behind these particular competitiveness indicators. this study examines the dynamics of price competition in considerable detail. As such. This study therefore focuses on the nature of product price as a measure of competitiveness in the Canadian “rack to retail” sector. gasoline is viewed by consumers as a commodity uniform in quality and widely available. uniform prices . is less clear. volatile pricing manifests itself in the form of a price war (see below). and more importantly. low prices and/or margins. free item with purchase or special price item with purchase. probably due to its relatively high cost. At its extreme. Establishing an objective measurement of price as a competitiveness indicator however. Examples are: • prominently displayed prices . their subsector margins.

the relationship between the supplier and dealer is generally as described on page 25. To understand the phenomenon of uniform pump prices. the supplier may temporarily intervene. bypassing the higherpriced outlet. While this support may take one of several forms. The other dealer has little choice but to quickly match. One of these competitors will be forced to make a difficult decision: to be the first to raise pump prices in order to restore gross product margins to a viable level. When this occurs. But if the pump price increase is a reasonable reflection of the underlying change in gross product margin. it is often cited as evidence that marketers engage in direct communication to “fix” prices at an agreed-to level. or even being squeezed to zero . competitors will likely match this price. If the posted price increase is too high. Pump price signs are an ubiquitous feature of the retail gasoline industry. A common factor in both falling and rising prices is the posted price sign: it is this device that instantaneously communicates pump prices not only to consumers. Pump prices therefore tend to move uniformly within a very short time. and provide to the dealer what is commonly referred to as price support. or even undercut the competitor’s lower price. but to competitors. This price lowering mechanism may sometimes result in a “price war” if each competitor continues to undercut the other. Finding 7: Price uniformity and price volatility. since they too must restore their gross product margins to sustainable levels. and gasoline is perhaps the only consumer product in Canada that is so consistently advertised in this way. for example). since there is no “dealer margin”. assuming that the rack price is unchanged. the wholesale rack price. 1 This does not occur at company operated or commission outlets. This is a misconception. one must adopt the perspectives of both consumers and competing. or even less than. facilitated through street price signs. MJ ERVIN & ASSOCIATES 21 . competitors may not follow. If one dealer decides to reduce pump prices (by two cents. the effect on many consumers is immediate: they will drive into that station. adjacent dealers. in an attempt to gain market share. There have been examples of this margin being squeezed to a point that is insufficient to cover operating costs. The effect of this upon the gross marketing margin is obvious: it is squeezed. gross product margin will eventually diminish to a point that is not viable for a majority of competitors. are indicators of a competitive market. Price Support In times of “normal” pump prices.where the ex-tax pump price is equal to.When pump prices are uniform. In the case of lessee or independent dealers however. who then react quickly to the change. in order to maintain a reasonable market share. there are times (during a price war in particular) when the retail pump price may fall to a level that provides the dealer with an insufficient margin1 to meet operating costs. or when prices rise or fall apparently in unison. Whether through falling pump prices or rising rack prices. its effect is to restore some measure of the dealer margin. obviously at the expense of the supplier margin.

Quebec has recently passed legislation which prohibits the selling of (retail) gasoline or diesel at a price which is lower than the (wholesale) cost to a retailer in any trading “zone”. which is administered by the federal Competition Bureau (Industry Canada). There are few current examples of direct government intervention in the pricing of petroleum products. While this study does not intend to undertake a detailed review of the effect of the Act. More recently. however. or of direct government intervention in marketing. A review of historical retail pump prices in the Halifax. Price maintenance: where a supplier exerts upward influence on prices upon a dealer. These cases have largely involved local dealers and/or isolated incidents. 1 Competition Bureau press release “Gasoline enquiries find no evidence of anti-competitive behavior” dated March 18. Price discrimination: where a supplier charges different prices to competitors in the same market who purchase similar volumes of products. control over retail pump price effectively reverts to the supplier. Perhaps the most notable of these was the 1986 Restrictive Trade Practices Commission (RPTC) study “Competition in the Canadian Petroleum Industry”. Following a year-long investigation. most with the general mandate of examining the “fairness” of competition and pump pricing among petroleum marketers. In addition. in the past twenty-five years the Bureau has prosecuted a total of 11 violations within the Canadian retail gasoline sector.Under the provisions of some price support mechanisms. Nova Scotia market may provide an example of the potential negative consequences of direct intervention. the Bureau found that there was no evidence to support these allegations1. Conspiracy: where several competitors act to fix prices for the purpose of reducing competition. Price Competition and the Regulatory Process All retail competitiveness in Canada comes under the purview of the Competition Act. resulting in 9 convictions. and a brief discussion of this case appears in part D. is beyond this study’s scope. The Bureau enforces provisions of the Act which prohibit: • • • • Abuse of dominant position: where a firm (or several firms in collaboration) uses its market power to lessen competition. The outcome of the RPTC study can generally be characterized as acknowledging that a healthy state of competition exists in this industry. the petroleum marketing sector has been the subject of several inquiries at federal. Prince Edward Island is the only province which directly regulates gasoline and fuel oil prices. An examination of the effect of the Competition Act. In addition. but reverts back to the dealer when the support arrangement is ceased. the Bureau investigated four well-publicised allegations of anti-competitive behavior on the part of major oil companies in the spring and summer of 1996. provincial and even municipal levels. 1997 MJ ERVIN & ASSOCIATES 22 .

creates an obstacle to. exit from an non-viable market. This issue is discussed more fully in part D.500 retail gasoline outlets across Canada. one can cite examples of regulatory obstacles to exit from the retail gasoline market. A practice. accounting for roughly 88% of all gasoline demand. may find it more attractive to continue operating a marginally viable gasoline outlet than facing the cost associated with the removal of inactive tanks and/or potentially contaminated soil. Conversely. in the form of standards for the decommissioning of retail petroleum sites. entry into an attractive market. it is clear that government policy plays an important role in facilitating. to some degree. These regulations clearly exist to the benefit of all. or inhibiting. and at least some of this capital cost is regulatory compliance-driven. So defined. promotes or limits market-driven pump prices. sales of gasoline through the roughly 16. creating a need for higher margins. a competitive climate. Retail gasoline sales. but the considerable investment represented by a modern retail outlet has the effect of limiting market entry to those with sufficient capital to put at risk. Retail Gasoline Demand Gasoline is but one of many products produced by the Canadian downstream industry (Figure 4). This may have the effect of reducing volume and revenue potential at other retail sites in the vicinity.Competitiveness Factors (Drivers and Inhibitors) Competitiveness factors can be defined as those forces which act upon the industry to increase (drive) or decrease (inhibit) competitive practices. is in part. that is. inhibit competition. it is the single largest one. as outlined above. It is important to acknowledge that many regulations affecting the retail gasoline industry. a consequence of regulations which stipulate minimum standards for the design and construction of petroleum storage tanks. and consequently. Finding 8: Some competitiveness inhibitors may exist in the retail gasoline market which are regulatory in nature. MJ ERVIN & ASSOCIATES 23 . or incentive for. higher pump prices. policy or regulation can be deemed to be a competitive factor if it: • • • • creates an obstacle to. The high cost of building a modern retail gasoline outlet for example. accounts for about 37% of all refined petroleum demand in Canada. particularly in smaller population centres. or incentive for. accounting for 41% of all petroleum demand. As a product group however. for safety and environmental protection. improves or reduces a “level playing field” in terms of the ability of one market to compete with another on the basis of price or operating costs. but exist to meet other important societal needs. Many smaller retail owner-operators. and is the single largest market for gasoline products.

it has no practical means to enumerate each and every outlet. This study provides an estimate of the actual retail outlet population. nor is there any federal or uniform provincial enumeration of retail gasoline outlets.7% Light/Heavy FuelOils 14.2% Retail Gasoline 37.452 Million Litres source: Statistics Canada (Cat# 45-004) National Retail Petroleum Outlet Representation The most frequent source of information on the population of retail gasoline outlets in Canada is the Octane Magazine Annual Retail Survey.9% Diesel Fuel 22.7% Lube/Grease 1.9% PetroChem Feedstocks 5. as shown in Figure 5.2% Asphalt/Coke 4.3% Total Sales Volume: 84.1988-1995 24000 22000 Estimate of Actual Outlet Population 20000 Octane Magazine Survey 18000 16000 14000 1988 1989 1990 1991 1992 1993 1994 1995 source: Octane Magazine (estimate by MJ Ervin & Associates) MJ ERVIN & ASSOCIATES 24 .Figure 4: 1995 Refined Petroleum Products Demand by Product Category Naptha/Avgas/ Stove/Kero 6.2% Propane /Butane 2. This survey accounts only for major established retail networks .6% Other Gasoline 4.2% Other 0. Figure 5: Canadian Retail Outlet Population .

Several possible relationships. There are two main stakeholders involved in the marketing of retail gasoline: the supplier. the retail outlet is owned and operated entirely by the product supplier. and the dealer. who manages the day-to-day operations at the retail outlet.500 in 1995. and usually owns the brand name seen at the retail outlet.000 outlets in 1989.The estimated number of retail outlets in Canada has declined from 22. The supplier. controls the setting of the pump price. to about 16. and all inventory and revenues belong to the supplier.513 723 source: Octane Magazine Retail Petroleum Outlet Modes The retail gasoline marketing infrastructure is much more complex than represented in Figure 1. Company Operated outlets have no MJ ERVIN & ASSOCIATES 25 . and this is of some importance with respect to the matter of prices and competition in this sector. as one might expect. Company Operated MARKETING MARGIN PRODUCT MARGIN = BRAND SUPPLIER MARGIN FREIGHT EX-TAX PUMP PRICE RACK PRICE In this mode. who holds initial title to the refined petroleum as it leaves the rack point. using Octane counts only) is roughly equivalent to population densities. Distribution of these outlets by province (Figure 6. exist between retail dealers and their suppliers. or modes. as owner of the product. Figure 6: 1995 Retail Outlets by Province PE 136 Northern Canada 65 576 NF 711 657 NS NB QU 3777 1610 BC 1716 AB SK 911 MB ON 3631 Total = 14. The principal dealer and attendants are salaried employees of the supplier.

sub-component margins . the supplier retains control of the retail pump price. based on pump sales volume. who may pay the supplier a lease fee for the use of merchandising space 26% Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Lessee EX-TAX PUMP PRICE MARKETING MARGIN PRODUCTDEALER MARGIN MARGIN BRAND SUPPLIER MARGIN FREIGHT DEALER PRICE RACK PRICE In the lessee mode. the “dealer” is actually an employee of the supplier supplier supplier typically the supplier 15% Control of Pump Price Dealer Compensation Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Commission Operator MARKETING MARGIN PRODUCTCOMMISSION EXPENSE MARGIN FREIGHT EX-TAX PUMP PRICE RACK PRICE In this mode.the entire gross product margin accrues to the brand supplier. supplier salary from supplier. the outlet facilities and petroleum inventory is owned by the supplier. and pays them from his commission revenue. The “dealer” is in essence. Since the supplier owns the petroleum product at this type of outlet. usually based on cents per litre of petroleum sales. an employee of the supplier supplier supplier typically the dealer. Control of Pump Price Dealer Compensation supplier a commission from the supplier. but the outlet operator (“dealer”) is compensated by a commission payment. The dealer in turn hires attendants. the supplier typically owns/controls the principal outlet facility which in turn is leased out to the dealer or lessee. who pays all outlet operating costs. The lessee purchases petroleum MJ ERVIN & ASSOCIATES 26 .

The dealer buys the petroleum product at a Dealer Wholesale price and in turn resells to the motorist consumer at a higher.product from the supplier at a “Dealer Wholesale” price. This Dealer Price. The margin between these two prices is the dealer’s gross revenue. the retail facilities are owned by the dealer. can vary considerably from one supplier to another. Control of Pump Price Dealer Compensation lessee lessee buys product from the supplier. unlike rack or pump prices. The distribution of retail outlets by mode has some important implications concerning the nature of gasoline pricing and competition. and means of compensation supplier. The margin between these two prices is the dealer’s gross revenue. and sells at the posted pump price. who may pay the supplier a lease fee for the use of merchandising space 14% Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Independent Dealer EX-TAX PUMP PRICE MARKETING MARGIN PRODUCTDEALER MARGIN MARGIN BRAND SUPPLIER MARGIN FREIGHT DEALER PRICE RACK PRICE In this mode. Control of Pump Price Dealer Compensation dealer dealer buys product from the supplier. less the Dealer (wholesale) Price charged by the brand supplier. MJ ERVIN & ASSOCIATES 27 . and has control over the retail pump price. and in turn resells to the motorist consumer at a higher pump price established by the lessee. The dealer pays most or all of the expenses associated with operating the outlet. and means of compensation dealer dealer dealer 45% Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Lessee or Independent outlets are the only modes in which a true dealer margin exists. since it is predicated on contractual arrangements between the dealer and the supplier. not the supplier. and sells at the posted pump price. This dealer margin is defined as the pump price (ex-tax). dealer-established retail price. who would typically charge a lease fee to the dealer for the use of the facility lessee typically the lessee.

This further limits the direct influence that a major oil company might have upon the Canadian retail marketplace. While a complete discussion of average throughputs in typical Canadian markets will take place in part D of this study. There is some evidence that there is a higher percentage of lessee and independent outlets in smaller markets than in large population centres. It therefore follows that no single oil company has a position of absolute dominance over the Canadian retail gasoline sector. virtually none of the major integrated outlets are company operated. and fully two-thirds operate as lessees or independents. some general figures are mentioned here. The remainder represent one of over 50 different marketer organizations. Therefore: Finding 9: Pump prices are established by the local dealer at over half of all retail outlets in Canada1. or Imperial Oil). This is significant: dealers who operate as lessees or independents are directly responsible for deciding upon the retail pump price. It follows that pump prices tend to be somewhat more directly controlled (ie: at the local community level) in smaller markets than in larger markets. Petro-Canada. who themselves establish pump prices. Roughly half of all retail outlets in Canada represent a major integrated oil company (Shell. Figure 7: Outlet Representation by Mode 16000 14000 12000 10000 8000 6000 4000 2000 0 Total outlets Major integrated Others 2235 3821 Company Operated Commission Dealer Lessee Independent 2022 9 2061 1059 Company Op 2226 1760 963 2298 6435 4137 source: Octane Magazine Outlet Throughput A key measure of outlet performance and viability in the downstream industry is the monthly or annual outlet throughput of petroleum products. 1 Unless the dealer is under a price support arrangement (for instance. In addition.Figure 7 shows that of all retail outlets in Canada less than half operate as company or commission dealers. during a price war) as previously described. MJ ERVIN & ASSOCIATES 28 .

Figure 8: Outlet Representation by Service 4000 3000 2000 1000 0 Car Wash CStore Kiosk Propane Service Bays source: Octane Magazine MJ ERVIN & ASSOCIATES 29 . Based on a sampling of outlets surveyed in this study.While an average outlet throughput may be in the order of 2. which in part has led to a reduction in retail product margins. The proliferation over the past two decades of ancillary services such as convenience stores and car washes. the revenue from so-called ancillary services is an increasingly essential element of retail gasoline marketing. feature both a large-area convenience food store and a modern car wash facility. Figure 8 depicts the Canadian representation of several key ancillary services.a result of significant retail outlet rationalizations (see Figure 5) which the petroleum products industry has undertaken. Most ancillary services are operated by the dealer/lessee. Ancillary Services Very few if any retail gasoline outlets limit their product offerings simply to gasoline.5 million litres. ancillary service has had the consequence of subsidizing the pump price of gasoline. average annual throughputs ranged from under 1 million litres in smaller population centres. these study findings show that this can vary widely from market to market. Many outlets have more than one ancillary offering: many “flagship” outlets for example. In fact. and is a result of. In effect. more fully described in part C. reduced petroleum margins. has had a profound effect on the retail gasoline marketing sector. who may pay the supplier (who is typically the owner of the facility) a lease or franchise fee for the use of the retail space. Canadian throughputs have dramatically improved in the past several years . to over five million litres in major markets such as Toronto. These improved outlet throughputs have provided for improved petroleum revenue potential. Improved outlet revenue from ancillary operations has caused.

in nominal (actual) and constant (inflation adjusted) dollars from 1986 to 1995. Figure 9: Annual Gasoline Price (Cents per Litre) 60¢ Nominal 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Source: NRCan 15¢ 1986 1987 1988 Including Tax Constant $ Excluding Tax Nominal Constant $ 1989 1990 1991 1992 1993 1994 1995 source: Natural Resources Canada / Statistics Canada Figure 9 shows the Canadian 10-city average regular gasoline pump price. Since 1 Data is not regularly collected on smaller markets. using a Canada 10city weighted (by provincial demand) average. an examination of the specific historical record of gasoline prices is useful. An “all markets” average.Part C Historical Trend Analysis This part of the study examines several historical price and margin trends in the Canadian retail gasoline sector. including smaller markets. prices are for regular unleaded (RUL) gasoline. Gasoline and the Consumer Price Index A common perception among consumers is that gasoline prices are steadily rising. Since rising prices are common to most consumer goods and services. the “Canada average” price reflects an average of urban markets only1. mainly using Canada average values. This part examines broad trends in several areas. particularly around 1990. when the Persian Gulf War caused crude prices to increase significantly. MJ ERVIN & ASSOCIATES 30 . This shows that pump prices have increased in nominal terms. as can be seen in part D of this study. Regional and market-to-market comparisons are presented in greater detail in part D. many utilize terms which are explained in part A. While some of the presented findings are selfexplanatory. would be somewhat higher. Unless noted. As such. and with which the reader should be familiar.

1990. both nominal and constant dollar prices are less in 1995 than in 1986: the constant dollar price of gasoline declined by 10 cents per litre from 1986 to 1995. 1986 = 100 Source: Statistics Canada Cat 62-010 Domestic Water Domestic Electricity Alcoholic Beverages Auto Repairs All Items Gasoline Fuel Oil Food Natural Gas Telephone Service source: Statistics Canada Key Price History Figure 11 depicts the history of Canada (10-city) monthly average regular gasoline pump prices. rack price. and there appears to be no lead or lag in the timing of pump price fluctuations relative to rack price changes. there appears to be little or no lead or lag in the timing of rack price fluctuations relative to crude price changes. MJ ERVIN & ASSOCIATES 31 . gasoline prices have had a mitigating effect on the Consumer Price Index (commonly referred to as the CPI or inflation rate). and relative crude cost. retail pump prices were about 7 cents less in 1995 than they were in 1986. When pump prices are reduced by the amount of tax content. In constant dollars. fluctuations in average pump prices (ex-tax) have closely followed changes in underlying rack prices. Several observations can be made from this: • • • • fluctuations in average rack prices have closely followed changes in underlying crude costs.Selected Goods & Services 180 170 160 150 140 130 120 110 100 90 80 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 Gulf War pushes crude oil prices upwards in 1990-91 Annual Averages. ex-tax equivalent prices. Finding 10: Gasoline has remained at or below the “all items” Consumer Price Index nine out of the past ten years. Figure 10: CPI Index Comparison . When compared to other consumer goods. as in Figure 10. It also depicts the associated margins. as defined in part A of this study. nominal pump prices decreased.

as Figure 11 shows. the following is evident that: Finding 11: Retail pump price trends are principally a reflection of changes in the underlying rack (wholesale) price of petroleum products. and the rise in the tax content. are principally a reflection of changes in the underlying price of crude oil. From Figure 11 it can be seen that urban retail pump prices declined somewhat from 1991 to 1994. which in turn. as might be suggested. it is also useful to examine the behavior of margins. Margin History While Figure 11 provides an indication of key price trends. and in fact have displayed a declining trend over the past six years. MJ ERVIN & ASSOCIATES 32 . due to additional market factors which affect pump and rack prices at any given point in time. and have risen slightly since 1994. This recent rise in pump prices is attributable to two factors: • • the rise in crude costs in this period. which are defined by the price points. the downstream industry operates on a “cost-plus” basis. as shown in Figure 12. In fact. then one might expect margins to be quite constant over time. nor do rack prices exactly follow crude costs. that is. If. the presence of these additional market factors have operated to the benefit of consumers. Figure 12 shows that industry margins have not been constant over time. It is important to state that pump price changes do not occur in exact lock-step with rack prices.Figure 11: Monthly Prices 1990-1996 (Nominal $) 70¢ Pump Price (Canada Average) 60¢ 50¢ Cents per Litre Pump Price excluding tax Tax Content 40¢ Rack Price (Canada Avg) Downstream Margin 30¢ Marketing Margin 20¢ Refiner Margin Crude Price 10¢ Jul-90 Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jul-96 source: Natural Resources Canada From these observations. as the next section shows. it simply passes on a fixed cost margin to determine the “correct” pump price.

Finding 13: From 1991 to 1996. this upward trend is not attributable to “downstream” refiner or marketing sector margins.Figure 12: Monthly Margins 1991-1996 (Nominal $) 30¢ Tax Content 25¢ 20¢ Canada Avg. compared to the Canadian average. A more thorough discussion of specific market factors for these and other centres appears in part D. 1 In fact. which have both shown a consistent decline throughout the period 1991 to 1996. In particular. emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. MJ ERVIN & ASSOCIATES 33 . while average combined Gross Refiner and Gross Marketing Margins decreased by about 7 cents per litre. Figure 13 is a comparison of regular gasoline gross marketing margins from 1991 to 1996 for selected centres. improved retail outlet performance as a consequence of higher throughputs due to outlet rationalizations (closures) and demand increases. several factors. as local competitive factors act to self-regulate pump prices. This shows that on a monthly basis.rack) Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Apr-91 Oct-91 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96 0¢ source: Natural Resources Canada Finding 12: Retail pump price increases from 1994 to 1996 are wholly attributable to increases in petroleum product taxation and crude costs. not weekly or daily data. the actual fluctuation is much more pronounced than shown. The decline in refiner and marketing margins has both resulted in. and has been a result of. the gross marketing margin can fluctuate quite significantly1. since the chart is based on monthly averages.crude) 5¢ Marketing Margin (retail . including: • • • improved refinery efficiency as a consequence of plant rationalization and a modest demand increase. the average tax content of regular gasoline pump prices in major Canadian cities increased by about 5 cents per litre. Regular Gasoline Downstream (Marketing + Refiner) Margin 15¢ 10¢ Refiner Margin (rack .

is presented in Figure 14. for several years. or even less than. US Price History The retail gasoline tax structure in Canada is vastly different than the US. This difference accounts for most. Figure 14: Canada / US Monthly Pump Price (Nominal $) 65¢ 60¢ 55¢ 50¢ Price per litre 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Apr-93 Oct-93 Jan-93 Jan-94 Jul-93 US Pump Price (Cdn ¢/l) Apr-94 Apr-95 Apr-96 Oct-94 Oct-95 Jan-95 Jan-96 Oct-96 Jul-94 Jul-95 Jul-96 Excluding tax Canada Pump Price US Pump Price (Cdn ¢/l) Including tax Canada Pump Price source: Natural Resources Canada MJ ERVIN & ASSOCIATES 34 . US pump prices. On an ex-tax basis. although Canadian pump prices in urban markets are clearly higher than in the US.Figure 13: Monthly Gross Marketing Margins. if not all of the difference in pump prices between Canada and the US. this is wholly attributable to the difference in taxation. resulting in significantly higher Canadian gasoline prices. with and without tax. A comparison of Canadian and US regular gasoline pump prices. Canadian pump prices have been roughly equal to. This shows that.Selected Centres 16¢ HALIFAX Canada Average 12¢ Price per litre 8¢ 4¢ 0¢ CALGARY TORONTO HALIFAX Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Apr-91 Oct-91 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96 (4¢) source: Natural Resources Canada (pump price inputs) & Bloomberg OBG (rack price inputs) Canada vs.

Canadian outlet throughputs (although likely still less than those of the US). • Although this study shows that on an ex-tax basis. Canadian consumers do not experience any retail gasoline pump price disadvantage to their US counterparts.Finding 14: Canadian retail gasoline pump prices are the competitive equal to those of the US. While these trends have also occurred in the US. have improved considerably. there are likely some differences in the competitive dynamics in US markets compared to Canadian markets. Rack Price History The behavior of rack or wholesale prices provides an indication of the degree of competition among refiners. as a result of outlet closures (see Figure 5. The introduction of Reformulated Gasolines (RFG) into some US markets has caused prices to rise. and moving up or down more or less in unison. Canadian ex-tax pump prices were historically somewhat higher than in the US. largely as a result of two factors: • Canadian marketing margins have decreased in this period. This would be a useful area for further research. From this it can be seen that Canadian and US rack prices. which is reflected in US average pump prices. Figure 15: Monthly Rack Prices: Selected Markets 31¢ 29¢ TORONTO SEATTLE (Cdn ¢/l) 27¢ VANCOUVER WINNIPEG Price per litre 25¢ 23¢ 21¢ BUFFALO (Cdn ¢/l) 19¢ 17¢ 15¢ Jul 93 Jul 94 Jul 95 Apr 93 Apr 94 Apr 95 Jan 93 Jan 94 Jan 95 Jan 96 Oct 93 Oct 94 Oct 95 Apr 96 Jul 96 source: Bloomberg Oil Buyers’ Guide / Natural Resources Canada MJ ERVIN & ASSOCIATES Oct 96 35 . Figure 15 compares these values for selected Canadian and US centres over a period of several years. Prior to 1994. page 24) and somewhat increased demand. RFG has not been introduced to Canadian markets. both a cause and an effect of improved throughputs and ancillary revenues as previously described. behave in a very similar fashion. trading at any given time within a relatively narrow (about 2 cents per litre) range. when compared on an ex-tax basis. This is no longer the case however.

300. not only in a given market. This phenomenon actually illustrates the essence of how competition in the petroleum industry operates to self-regulate the price of gasoline: The rising demand for gasoline which occurs every spring has a diminishing effect on product inventories.100.000 2. any given Canadian or US rack point cannot successfully price its wholesale product substantially higher than that of any other rack market in continental North America.000 1.That Canadian rack prices are so closely tied to those of the US is strong evidence of the interdependence of these two macro-markets. and prices tend to fall. Yet in the latter half of each year. and falling in the latter half of each year.000 2.000 2. and as would be expected in any commodities market under these conditions. Such a pattern is sometimes perceived as evidence of refiner or supplier “price gouging”. Price History Figure 16 shows the history of Canadian gasoline demand. Simply put. increasing significantly every spring. albeit less distinct pattern. compared to average ex-tax regular gasoline pump price for the same period. of motor gasolines from 1991 to 1996. Gasoline demand exhibits a very regular seasonal pattern. the price tends to be bid upwards.700. To do so would invite the inevitable consequence of rack customers themselves sourcing their product needs from the rack point that offers the lowest price (plus freight expense). Pump Price (nominal ¢/litre) 3.700.100. As non-refiner marketers attempt to secure a supply of this diminishing inventory.000 2.000 34¢ 2. Figure 16: Monthly Demand vs.000 Jan-91 14¢ Jan-92 Jan-93 Jan-94 Jan-95 Ex-tax Pump Price (Canada avg. or indeed anywhere.000 1. or sales. Gasoline price exhibits a similar.900. conditions begin to favour a “seller’s market”.000 24¢ 1. as demand ebbs and inventory improves.900. a “buyers market” develops.500. but in fact across the North American continent (US demand follows a similar pattern).500. per litre) 12 Month Moving Average 19¢ 29¢ 44¢ Monthly Demand ('000's litres) 39¢ source: Statistics Canada (demand) / Natural Resources Canada (price) MJ ERVIN & ASSOCIATES 36 . rising and falling closely in step with demand. Demand vs.

demand rose approximately 8. This is of course. and it can be seen to operate as effectively in the Canadian petroleum products industry as it does in any open market. which consists of the refiners and marketers of gasoline and other petroleum products. The next part of this study will undertake a comparative perspective: examining pump price and margin differences that exist between individual markets within Canada. competing to meet their own needs. MJ ERVIN & ASSOCIATES 37 . All of the findings suggest that. pump prices have increased due to a significant rise in crude costs in this period). while world crude prices and Canadian taxes have generally increased over the past several years. in that prices have fallen. Finding 15: Seasonal fluctuations in retail pump prices are ultimately linked to wholesale product inventory levels. their related product costs and margins. the essence of a free market economy. has operated in a highly competitive environment. The traditional supply-demand model predicts that when demand rises. so do prices. Figure 16 shows that from 1991 to 1995.3%. as evidenced by declining industry margins. and this is clearly demonstrated in the case of gasoline prices on a seasonal basis. gasoline prices have not followed the traditional model. the downstream petroleum industry. despite a rise in demand. and product taxes which add to the consumer price of gasoline. price fluctuations at the rack (and consequently at the pump) are a simple reflection of buyers and sellers alike. while average ex-tax pump price declined by 14% (since 1994. which ensures a competitive product price for buyer and seller alike. a feature of most marketregulated commerce. This part of the study presented a number of historical views of retail gasoline prices. On a long-term basis however.Whether in the spring or the fall.

outlet volumes. freight. there is no regular monitoring of pump prices in smaller centres. • Methodology Selection of Markets A number of markets were selected for the study.. so that a broad range of the following criteria was represented: • • • • • population proximity to refinery proximity to primary supply point proximity to US border proximity to other retail markets Twenty markets were initially selected by the committee. A number of factors such as taxes. Part D of the study therefore has two main objectives: • an examination of a diverse array of markets in order to determine the degree of similarity or dissimilarity between them.Part D Selected Markets Study Introduction A review of public domain data on current and historical prices as presented in part C. although one was subsequently dropped due to insufficient submitted data. and in order to provide insights into the range of competitive dynamics that may exist. ancillary revenues. etc. play a role in a market’s pump price. margins and related implications for market competitiveness than can simply be provided by existing public-domain data. and a more detailed examination of price. but contains two inherent limitations: • • data is drawn exclusively from major Canadian centres. Nineteen markets were therefore adopted for the study (Table 3). and pump prices alone provide very little opportunity for “comparability”. is useful in providing broad overviews of industry price and margin trends. outlet costs. namely product margin. These “outside factors” tend to obscure the more relevant aspect of pump price. which relates solely to that sector of the petroleum industry directly involved in using pump price as a competitive tool. MJ ERVIN & ASSOCIATES 38 .

Ontario. Furthermore. Table 3: Selected Study Markets Total (19) Group A (8) BC/PR (9) Vancouver* Victoria White Rock Calgary* Winnipeg ON(4) Toronto Ottawa* QU/AT (6) Montreal* Group B (11) Nanton AB Peace River AB Regina* Thompson MB Sault Ste Marie* Sioux Lookout Chicoutimi* Gaspé Saint John NB* Charlottetown Halifax * forms part of ancillary revenue and cost analysis Sources of Data In order to conduct a detailed study market analysis of retail marketing operations. MJ ERVIN & ASSOCIATES 39 . To this end. To examine the competitiveness of the marketing.are influenced not by one. In addition. In all. Process Overview As illustrated in part A. Five companies responded to this request: Imperial Oil. member companies of the Canadian Petroleum Products Institute (CPPI) were approached to provide detailed outlet operating petroleum and ancillary revenue and cost data2 for a random sampling of outlets in each of the selected study markets. and Quebec/Atlantic) and market size: Group A markets included population centres in excess of 500. confidential data were collected and independently evaluated on 481 retail gasoline outlets in 19 Canadian markets. both the dealer and the product/brand supplier realize revenue and incur costs associated with an outlet. This study compiled both sets of financial data in order to produce a net revenue/cost per outlet picture which eliminated the effect of mode differences. Petro-Canada. retail outlet and brand representation. and for smaller markets.and consequently competitiveness . it was essential to obtain data not normally available through existing public sources. the gross marketing 1 Although White Rock is clearly not a major centre by itself. Suncor Inc. its situation in the Greater Vancouver Regional District placed it in the category of a Group A market. these organizations provided market-level data on freight costs.000.0001. and Group B markets less than 500. but a number of variables. and Canadian Tire Petroleum. or “rack to retail” sector. the gross marketing margin must be examined in isolation from those other variables. Shell Canada.Each market was classified according to regional affiliation (BC/Prairie. 2 Depending upon the outlet mode. price history data not available through public sources. retail pump prices ..

This allows for an accurate determination of net outlet revenue. average pump prices are higher than actual average regular gasoline prices. Process Description Figure 17 shows an overview of the process used to reduce the study market 1995 pump prices into its sub-elements: Figure 17: Study Market Methodology PUMP PRICE 1 EX-TAX PUMP PRICE RACK PRICE CRUDE PRICE FREIGHT TAX OUTLET VOLUME 3 PRODUCT MARGIN 5 REFINER MARGIN UPSTREAM 2 6 7 DEALER PROFIT MARKETING COSTS MARKETING PROFIT ANCILLARY REVENUE PETROLEUM REVENUE PER OUTLET OUTLET COSTS 4 PETROLEUM REVENUE PER OUTLET CONSOLIDATED NET INCOME PER OUTLET OUTLET COSTS 1. The gross product margin thus serves as an interim basis for comparing study markets. rack price. 1995 average values were determined for pump price. 1 Although outlet cost and ancillary revenue data was not available for all markets. Group B (smaller market) and 19-market study averages. as the “blended” price includes other product grades. From participant company supplied data. average outlet annual throughput was determined for each market. including some smaller centres. and freight. 3. this study postulates that average outlet throughput in each market may be a significant factor affecting margins and prices. 2 Accordingly. MJ ERVIN & ASSOCIATES 40 . to derive the 1995 average gross product margin for each of the study markets. Finally. Where differences in gross product margin might still exist. a market-by-market profile of outlet income is presented. by product grade. a broad representation of markets was possible. tax content. rack price. The variables of tax content.margin is stripped of its freight component. Gross product margins are therefore compared to corresponding volumes to determine if a cause-and-effect relationship exists. in addition to operating cost and ancillary revenue data gathered in the study1. Where applicable. Values were weighted by market population using 1991 Statistics Canada census data in order to determine Group A (major urban). to arrive at “blended” values2. these were weighted by volume. the study postulates that outlet operating costs and revenues from ancillary sources (such as convenience store sales) might affect how the dealer establishes competitive pump prices. 2. For each market. and the final “rationalized” gross product margin was determined for each market. and freight were successively removed from the pump price. weighted by sales demand. Using the derived gross product margins and volumes for each market.

objective data exist for both of these values. These differentials do vary from one market to another. and gross product margins are therefore likely to be understated. including relatively smaller ones such as Sioux Lookout or Gaspé. Rack prices used in this study are taken from Bloomberg Oil Buyers’ Guide™. also considering that RUL constitutes the majority of product. accurate comparisons are possible. The derived weighted average values of pump price. and therefore where assumptions were made. encompassing a significant portion of the entire Canadian market. In referring to marketing margins.. so that on a cents-per-litre basis. marketing margin. and outlet operating costs were deducted from total revenue. average revenues from ancillary services were added. grade differentials were based on known differentials of nearby markets. but they are relatively minor. a recognized source of data on world crude oil and petroleum markets and prices. freight. 6. product margins. This value was then applied to the gross product margin to determine average outlet petroleum revenue. petroleum revenues.. represent a broad range of markets. etc. many wholesale petroleum purchases are made at less than the “posted” rack price. A dollar-per-outlet estimate of these elements was made. The resultant consolidated net revenue per outlet was examined in terms of its component elements of Dealer Income.4. or consolidated net incomes. these 19 markets represent a combined population base of 8. Unlike retail pump prices however. When these margins are applied to outlet throughputs as in step 4 above.7 million. 5. Wholesale refined product prices used in this study are therefore likely to be overstated.. From participant company data. . 7. Also. Interpretation of Data In some smaller centres. the effect on the “blended price” is small. Supplier Overhead costs. Since actual wholesale prices (using transfer or contract prices) are not available in the public domain. and from one brand to another. MJ ERVIN & ASSOCIATES 41 .. This variation is constant across all nineteen markets however. as described on page 10. the rack price basis results in petroleum revenues which are understated to a somewhat greater degree in high throughput markets than they are in low throughput markets. perhaps by 1 to 2 cents per litre.. it is important to understand that the use of rack price in this analysis has certain implications. and accordingly represent a broad spectrum of consumers and marketers.to determine average consolidated net revenue per outlet. While clear. and supplier profit. Use of Rack Price The derived value of retail gross product margin is essentially based upon two price points: pump price and rack price. the Bloomberg rack price is used as the defining wholesale price point which differentiates between the refiner and marketing sectors. Bloomberg rack price values were used as the assumed wholesale price.

The data also shows that typically. and based on objective. The 19-market study group exhibited a statistical variance1 of 17. table J for an explanation of how variance is derived. independently gathered data. Figure 18: 1995 Average "Blended" Pump Price 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ Price per Litre 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River On the basis of posted pump prices. but a variance of only 12. while lower prices tended to prevail in major centres. and these tend to interfere with an objective comparison of fundamental competitive differences which may exist. The first of these variables to be examined is tax. MJ ERVIN & ASSOCIATES 42 . Study Market Findings Posted Pump Price Figure 18 shows 1995 average retail pump price (using a “blend” of gasoline and diesel grades) for each of the 19 study markets.8 cent difference in pump price 1 See footnote at Appendix II. Several variables beyond the control of the retail gasoline sector are incorporated into the pump price however.38 cents per litre in ex-tax pump price. there is little to suggest why such a high variance exists.64 cents per litre in pump price. broken into tax and extax components. higher priced markets are associated with smaller population centres. Tax Figure 19 shows posted pump prices for the study markets. The data shows a statistical pump price variance of over 17 cents per litre within this study group. The study data suggests that variations in tax rates account for a significant part of pump price differences. accurate.Rack prices used in this study are nevertheless market-driven. A 6.

tax. Figure 19: Pump Price . as described in part A. GST content can vary by market. but the variance is minimal . the resultant ex-tax pump price nevertheless represents a gross margin for the entire oil industry. accounting for roughly half of the average retail price. This eliminates any effect that tax variability may have. was less than three cents. thus providing a better basis for comparison. Average 1995 taxation within the study group ranged from 22 cents per litre (Nanton) to 28.less than one-half cent per litre. additional elements of the revenue stream must be further isolated. MJ ERVIN & ASSOCIATES 43 . The data shows that taxation between markets within the same province varies little.75 cents per litre (Vancouver. In all study markets.between Calgary and Vancouver for example. provincial tax rates can vary greatly. when examined on an ex-tax basis. or when examining historical price trends. Montreal).while all markets are subject to the same rate of federal excise tax and GST1. namely the upstream industry and refiner sector. taxes were a significant element of pump price. ex-tax elements 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ Cents per litre 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River 95 Blended Tax 95 Blended Extax Price Finding 16: Provincial differences in product taxation are a predominant cause of inter-regional pump price differences. Upstream and Gross Refiner Margins Although the deduction of tax content is useful. it is therefore more useful to use ex-tax pump prices when comparing any two markets. Since the level of taxation is clearly a factor which is beyond the control of the petroleum industry. while taxation between provinces is more pronounced . 1 Due to pump price differences. As this study seeks to isolate the marketing or “rack to retail” sector as a competitive entity.

It can also be seen that upstream/refiner margins for remotely located markets such as Thompson MB. in the case of Thompson). Furthermore. if a clear understanding is to be achieved. Figure 20 shows ex-tax pump price isolated into its upstream/refiner (ie. This is due to the fact that for any market. one region cannot maintain rack prices at a higher level than another. the rack price is set at the rack point (Winnipeg. and their respective margins. it should be restated that each of these sectors. rack price) and gross marketing margin elements. Figure 20: Ex-Tax Pump Price Elements 40¢ 95 Retail Marketing Margin 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River 95 Blended Rack Price As many petroleum marketers are also involved in crude oil production and product refining. the rack price is equivalent to the upstream margin plus the refiner’s margin. rack and pump prices. as is examined below. reflecting some differences in refinery crude acquisition costs. are clearly delineated by market-driven crude.assuming transport costs did not outweigh the price difference. Freight costs are additional. the validity of analyzing gross marketing margins in isolation might be raised. the dynamics of (marketing) retail pump prices are quite distinct from those of (refiner) rack prices.Since the refiner’s rack price incorporates the raw material cost (crude price) plus the “value-added” element of refining. The figure shows that combined gross Refiner/upstream margins are relatively uniform among the study group. the resultant gross marketing margin represents that portion of the pump price model which relates solely to the retail marketing sector. MJ ERVIN & ASSOCIATES Cents per litre 44 . To address this. reflecting the reality that at the rack level of competition. differ little from those of major centres. When rack price is deducted from the ex-tax pump price. and therefore are best analyzed separately. but ultimately. as this would cause rack buyers to bring product in from the lower-priced region .

it is therefore important to eliminate the freight variable from the gross marketing margin. It is axiomatic that remote markets incur higher freight costs than those located close to the source of supply. Finding 17: Market-specific differences in product freight are a key factor in inter-market ex-tax pump price differences. Figure 21: Gross Marketing Margin Elements 20¢ 15¢ Freight Cost 95 Retail Product Margin 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River Elimination of the freight variable reduced the study group’s statistical variance from 13. particularly in comparisons of major urban markets to small. Two of the study markets had freight costs in excess of 3.0 cents per litre. Although freight operations are often an integral part of many petroleum marketing operations.16 cents per litre (gross marketing margin) to 7. Before using this as an analytical tool however.49 cents per litre (gross product margin). with their component freight costs. as low as 0. MJ ERVIN & ASSOCIATES 45 . To provide a comparative view of the marketing dynamics within the study group. Figure 21 shows a study market comparison of gross marketing margins. this freight cost is almost negligible. resulting in comparative gross product margins. it is essentially a “non-core” business. For other. generally smaller markets. one final outside variable must be isolated: that of product freight. most Canadian marketers contract out at least some of its product distribution needs to third party cartage companies. For markets which are also established as rack points.3 cents per litre. and therefore a significant pump price factor. the data shows that freight is often a significant part of the gross marketing margin. in fact. remote population centres.Gross Marketing Margin and Freight Cost The gross marketing margin provides for a useful comparison of revenue streams available to the retail gasoline marketing sector.

a variance of only 2.5 cent per litre average relates to regular gasoline in major markets. Group A (larger population) markets averaged 5. whereas the study market result cited here incorporates all gasoline grades and a broad variety of population centres. Bloomberg rack price values were used as the assumed wholesale price. as the 3. was the highest of the study group. For all study markets.95 cents per litre. petroleum revenues.42 cents per litre.5 cent variance in gross product margin is still significant however. product margins.5 cents per litre average Gross Product Margin cited in Part B. A 7.the gross revenue available to the petroleum marketing sector for its operations. it is evident that the non-industry factors of taxation and freight cost are partly responsible for pump price differences between any two markets. while Toronto. which suggests that there may be an additional factor which is responsible for pump price 1 This is considerably more than the 3.5 cents). while Group B markets averaged 7. at 3. The study revealed that: • • Retail gross product margins differ very little between major urban markets . 1995 gross product margin averaged 5. or consolidated net incomes.17 cents per litre. was the lowest.06 cents per litre.6 cents) to the variance in their component gross product margins (7.Retail Gross Product Margin Figure 22 provides a comparison of the original pump price for each study market.6. Figure 22: Petroleum Gross Product Margins 70¢ 60¢ 95 Retail Product Margin 95 Blended Pump Price 50¢ 40¢ 30¢ 20¢ 10¢ 0¢ Victoria Vancouver White Rock Winnipeg Calgary Nanton Regina Toronto Ottawa Sioux Lookout Chicoutimi Saint John Thompson Peace River Montreal Halifax Gaspé Sault Ste Marie Charlottetown When comparing the variance in pump prices within the 19-market study group (17. to the resultant retail gross product margin . In referring to marketing margins. Gaspé. MJ ERVIN & ASSOCIATES 46 . or between any two regions.22 cents per litre Smaller markets showed a wider variance in gross product margin . at 14.68 cents per litre1.68 cents per litre.

2 cents per litre in Gaspé. This study’s data shows that the range of volume performance among outlets within a given market is relatively narrow. ranging from under 700.000 0 Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River Relationship of Gross Product Margin to Outlet Throughput Figure 22 shows that. a distinct relationship between product margin and outlet throughput emerges: MJ ERVIN & ASSOCIATES 47 .differences between markets.14.1 cents per litre in Toronto.000 litres per year (Toronto).000 Litres 3. an examination of related outlet throughput volumes is necessary.000. vs. sold significantly less than 5 million litres of petroleum per year. Outlet Throughput Figure 23 shows average annual outlet throughput (sales volume) for the study group. for example. If these two factors are related to each other as they are in Figure 24. To understand why such a wide range of margins can exist after eliminating all tax and freight variables.000. A wide range of volume performance is evident.000.000.000. Indeed.000 4. it would likely be so unprofitable as to be un-viable.000 5.000 litres per year (Sioux Lookout) to over 5. 3.000. Figure 23 shows a similarly wide range of variability in average throughput per retail outlet within these same markets. Figure 23: Average Annual Throughput per Outlet 6. once isolating retail gross product margin from all of the “outside” pump price factors. if any retail gasoline outlet located in the Toronto area for example.000 1.000. a wide range of variability still exists between markets in the study group .000 2.

000 2. It can be seen from Figure 25 that major centres (Group A) generally experience smaller retail gross product margins (5. they remain essentially the same regardless of volume changes . it follows that higher gross product margins will be the consequence.95 cents).Figure 24: Outlet Volume vs.000.000 3.4 million litres annually. while those with high Gross Product Margins tend to have low outlet throughputs.000.6634Ln(x) + 76. With few exceptions. Gross Product Margin 18¢ Peace River Thompson Chicoutimi Saint John Charlottetown Victoria Vancouver White Rock Calgary Regina Winnipeg Ottawa Sault Ste Marie 16¢ 14¢ 12¢ Gaspé Sioux Lookout 10¢ 8¢ 6¢ Nanton 4¢ Toronto 2¢ y = -4. all market groups (BC/Prairie.000.000 6. This analysis of outlet throughput and gross product margin by market leads to one of the more significant findings of the study: Finding 18: After accounting for differences in taxation and freight the remaining difference in retail pump prices between markets is very closely linked to market differences in average sales volumes such that markets with low Gross Product Margins are associated with high outlet throughput volumes. and the higher prices (and margins) generally seen in these markets were a function of poor volume performance.that is. Although MJ ERVIN & ASSOCIATES 48 . and Quebec/Atlantic) exhibit a close adherence to expected margins based on throughput. If all outlets in a given market experience generally low throughputs.7 million respectively.000.6624 1. an outlet with low throughput would derive less petroleum revenue than a high-volume outlet.000. the Group A market outlets had roughly 50% more throughput than Group B outlets . compared to 2.962 R2 = 0.a low volume outlet would be much less profitable than one in the same market with significantly higher volumes.000 Volume (litres) 4.000 Halifax Montreal 0¢ That such a relationship would exist is understandable: with the same margin.42 cents) than smaller (Group B) population centres (7. Regionally. As most outlet operating cost are fixed in nature .000 5. On average however. not of poor competition.000. Ontario. the 19 study markets exhibit a high degree of uniformity of gross product margin as a function of outlet throughput. Smaller markets perform as competitively as larger centres.

Consolidated Net Revenue per Outlet To create a complete.000. Consolidated net revenue is the result of combining gross petroleum revenue (gross product margin times throughput) plus ancillary revenue (excluding cost of merchandise).000. and ultimately shows that very little difference in competitiveness exists between any two markets. this is likely due to the higher incidence of Group B study markets within this region.000 5. supplement their incomes with other revenues. competitiveness occurs between retail outlets.000 3.Quebec/Atlantic markets appear to experience higher margins (and smaller throughputs) than other regions. which for the study group. and must be examined.000 4. Ancillary revenues are those derived from non-petroleum sales sources. as described below. Figure 25: Outlet / Volume Relationship . outlet-based view of retail markets. supplier overhead costs. and the resultant consolidated net revenue.000. however. These additional factors clearly have an effect on the relative competitiveness of retail markets.000 Volume (litres) The examination of gross product margin as a function of outlet throughput provides a comprehensive and objective rationalization of inter-market pump price differences. such as convenience stores. product cost.the revenue available for dealer income. and auto service.000 6. In reality. and incur many expenses in the course of their commerce.000. car wash.Regional & Urban Groupings 18¢ 16¢ 14¢ 12¢ 10¢ 8¢ Group B markets QU/AT markets BC/PR markets Group A markets Ontario markets All study markets 6¢ 4¢ 2¢ 0¢ 1.000. It represents the residual revenue which is available to the dealer and to the supplier.000. Figure 26 summarizes total outlet petroleum sales.716 . which.000 2. two additional factors are introduced: ancillary revenue and outlet operating costs. while operating costs are those costs which are directly incurred in the operation of the retail facility. and supplier MJ ERVIN & ASSOCIATES 49 . ancillary sales. averaged $69. is only a measure of petroleum revenue per litre. Gross product margin. less outlet costs. in addition to petroleum sales.

these ancillary operations contributed to a lower product margin and consequently.profits.000) $(300. Table K).Group B outlets were not as profitable as these revenue values might suggest. which reflects his investment in the outlet. as explained below.000) $(200.000 $100.000 $150. As described above. causing the weighted average for Quebec / Atlantic to be depressed).000) $(150. consolidated net revenue is the residual revenue which is available to the dealer and to the supplier.000 per year respectively . reduced pump prices.000 vs. Finding 19: Based on published rack prices. Income BC/PR $300. $60.000 $50.000) $(350.$154. In effect.000) 1: Net Retail Petroleum Revenue 2: Ancillary Revenue 3: Outlet Costs 4: 95 Consolidated Retail Outlet Income The findings depict that some inter-regional differences in outlet net revenue exist.000) $(100. Although outlets in smaller (Group B) markets had higher outlet consolidated net revenues than major market outlets . Most markets showed relatively similar net revenues (see Appendix II. The study average retail gasoline outlet would have experienced a net loss without the contribution of ancillary operations. and his personal labour investment. Costs.000) $(250.000 $200. An examination of these component elements reveals a significant finding: that for most markets. MJ ERVIN & ASSOCIATES 50 .000 $250. petroleum revenues alone are insufficient to offset the operating expenses associated with retail petroleum outlets. although these differences are somewhat overstated (market data for Montreal showed particularly low net revenue. A discussion of the ultimate distribution of this revenue is useful. petroleum sales revenues alone were insufficient to cover operating costs for the 481 individual outlets studied. Figure 26: Outlet Revenues. Dealer and Supplier Profitability Consolidated net revenue represents the source of cash flow for three distinct purposes: • dealer income/profit: the return or salary to the dealer.000 $($80) ON QU/AT Group A Group B All Study Mkts $(50.

supplier overhead: all operating costs of the supplier that are not directly associated with a single outlet. These costs would include salaries of marketing representatives and management, brand advertising, corporate charity, sales processing, head office and regional office overheads, etc.. supplier profit: after the above costs are allocated, the residual revenue is available as profit to be re-invested into retail operations, and/or distributed to shareholders.

Although ideally, this study would quantify each of these values, there are no clear, objective means to do so. In particular, the measurement and subsequent allocation of supplier overhead costs on an outlet-by-outlet basis is an inexact science, at best. This study therefore provides an estimate of these values, as shown in Table 4.

Table 4: Estimated Cash Flow from Consolidated Net Revenue
All Study Market Avg. Consolidated Revenue (data supported) comprised of (estimated): Dealer Income Supplier non-outlet Overhead Supplier Residual Profit $32,000 $52,000 $(14,000) 0 to $60,000 $30,000 to $70,000 $(30,000) to $150,000 $70,000 Estimated Range ($15,000) to $220,000

note Supplier overhead estimates are based on MJ Ervin & Associates research data not directly related to this study.

Despite the fact that these table values are estimates, the values, and the supplier residual profits in particular, are believed to be a reasonable assessment of the state of retail profitability in Canadian retail petroleum markets. Accordingly, in 1995, a typical retail outlet is estimated to have returned a net loss to the supplier in the order of $14,000, using Bloomberg rack prices as the cost basis. Finding 20: For the 481 individual outlets studied, after the average 1995 outlet revenues were distributed to meet dealer income and the supplier’s marketing overhead requirements, the residual represented a net loss to the supplier. Taking into account the possible discounts from posted rack prices and independent brands’ lower marketing overheads, residuals for outlets not studied may be better. This may contradict other indications that 1995 in fact may have represented a profitable year for Canada’s major oil companies. This was unlikely to be as a result of retail marketing operations, however, and was more likely a result of other operations including upstream, refining, or petrochemicals. Also, non-refiner marketers, who did not contribute to the study database, may have realized somewhat better profitabilities than indicated here: it is likely that their dealer costs and supplier overheads are less than those of major oil companies. Nevertheless, this data illustrates an important finding:

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Finding 21: Based on published rack prices and the individual outlet data, the profitability of the 481 outlets studied appears only marginal. The viability of the Canadian retail gasoline sector as a whole may be somewhat better, given the possibility of discounts from posted rack prices and potentially lower overhead costs. Unlike the major market outlets, rural market outlets used in this study appeared to be somewhat more profitable. This may not be representative of rural outlets in general, however, since the 11 Group B markets were chosen for this study for some particular criteria, not necessarily to be “typical” small-population markets.

Market by Market Competitive Analysis
This section of the study provides a detailed market-by-market analysis of the 19 study markets for the purpose of illustrating some competitive dynamics that may exist in retail gasoline markets.

Explanation of Format
Each market commentary begins with a demographic overview as shown below, providing values and rankings for a number of parameters: • • • • • population - taken from 1991 census data, this is the population of the greater metropolitan area (census district) of each municipality. # of brands - number of brands, as reported by study participants. # of outlets - estimated number of outlets, as reported by study participants. outlets per 10,000 - number of retail outlets per 10,000 population. avg outlet volume/yr - average outlet annual throughput, based on participantprovided outlet data. Total market volume and total outlets were not used to derive this measure, as they are estimates only. 95 mktg mrgn - gross marketing margin, as defined in part A of this study. freight - freight cost per litre associated with transporting petroleum from the rack point to a typical outlet in the market. 95 prod mrgn - gross product margin, as defined in part A of this study. rank or rank* - ranking of the value within the range of study group values. Where an asterisk appears (*), rankings are lowest value = 1, otherwise highest value = 1. sample size - the number of retail outlets for which data was collected in this market.

• • • •

Where sufficient data exists, a historical record of relevant prices is shown in graphical form.

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Victoria
population # of brands # of outlets outlets per 10,000 299,550 12 106 3.54 rank 8 rank 9 rank 8 rank* 6 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3,223,068 litres 6.89 ¢ 0.41 ¢ 6.48 ¢ rank 9 rank* 7 rank* 10 rank* 7

sample size 26

General: Victoria is a relatively major market, and its location on Vancouver Island presents some uniqueness with respect to supply. Geographic / Supply / Freight cost considerations: As Vancouver Island has no refinery, Victoria depends upon marine supply from the Vancouver mainland, or potentially from any marine source of supply in the Pacific Rim. This broad access to supply has occasionally allowed some marketers to purchase “spot” gasoline at relatively low rack prices, creating a short-term drop in pump prices. In the past several years, the rack market across Canada has grown more robust, such that all Canadian rack prices now follow those in the US very closely, and most Canadian markets now benefit from the same type of cross-border rack competition that Victoria had experienced. Influence of other markets: Due to its geography, consumers in this market are somewhat “captive” to the local retail gasoline marketers: no opportunity exists to drive to other markets to purchase retail gasoline on a casual basis. This had no apparent effect on the level of competition or price levels however, as described below. Price history / Taxation: Pump prices have historically been quite volatile, often at times when other markets have been quite stable, as described above. Victoria collects a 1.5 cents per litre municipal tax. Ex-tax pump prices are on average, very close to the Canadian 10city average. Margin/Throughput relationship (Figure 24): Victoria fell within a cluster of markets with similar margin/throughput relationships. Product margin was marginally less than expected for a market with these throughput characteristics. Consolidated net revenue: No ancillary or outlet cost data was available.

Figure 27: Victoria - Price History
60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢
Crude Oil Price Vancouver Rack Price Victoria Posted Price - ex tax Canada Average - extax Victoria Posted Pump Price RUL Canadian Average Posted Pump Price

10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Jan-92 Jan-93 Jan-94 Jan-95 Oct-95 Jan-96 Jul-92 Jul-93 Jul-94 Jul-95

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89 rank 3 rank 5 rank 3 rank* 2 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3.extax Canadian Average Posted Pump Price Vancouver Posted Pump Price RUL MJ ERVIN & ASSOCIATES 54 .542. driving distances preclude most Vancouver consumers from routinely accessing this neighboring market. Overall.ex tax Canada Average .38 ¢ 7. Margin/Throughput relationship (Figure 24): Gross product margin was slightly high.745 18 446 2. The somewhat high margin placed this market slightly above.Vancouver population # of brands # of outlets outlets per 10. Vancouver is also a terminal for a refined products pipeline from Edmonton. Vancouver collects a 4 cent per litre municipal tax. Geographic / Supply / Freight cost considerations: As a port city. Influence of other markets: Although relatively close to the US border.98 ¢ 0. and also has local refining capacity. net outlet revenues were less than those of other major centres. Figure 28: Vancouver . while average throughput ranked 4th.000 barrel per day plant located in the greater Vancouver area. Low consolidated net revenues may have contributed to the higher margin. as described below. contributing to a higher than average pump price.000 1. Vancouver provides several perspectives into retail marketing. ranking 11th.60 ¢ rank 4 rank* 9 rank* 9 rank* 11 sample size 37 General: As one of Canada’s major retail markets. but well within a cluster of markets with similar throughputs. a 60.658. Price history / Taxation: Pump and ex-tax prices have historically been somewhat higher than the Canadian 10-city average.968 litres 7. this market has access to numerous refiners along the Pacific coast through marine supply. and with access to wholesale product by several means.Price History 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Apr-93 Apr-94 Apr-95 Apr-96 Oct-92 Oct-93 Oct-94 Oct-95 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Vancouver Rack Price Vancouver Posted Price . Consolidated net revenue: Vancouver outlets averaged the highest in both ancillary revenue and outlet operating costs. This may explain the somewhat elevated gross product margin in this market.

Vancouver. In all respects. adjacent to the United States border. at least in this market. but less than most markets with a small population base.White Rock population # of brands # of outlets outlets per 10. Geographic / Supply / Freight cost considerations:. Despite its relatively small size. price/competitive dynamics appeared to relate more to the influence of Vancouver than to any cross-border factors.53 ¢ rank 5 rank* 9 rank* 12 rank* 10 sample size 5 General: White Rock is situated on the lower mainland of BC.000 16. thus providing some unique characteristics for the market study. White Rock’s margin was typical of markets with similar outlet throughputs. White Rock is essentially part of a major market due to its proximity to Vancouver.98 ¢ 0.604. gasoline “cross-border shopping” is less pronounced than might be expected. This market is close to its usual rack point.45 ¢ 7. or competitive dynamics. prices. this market is subject to a 4 cent per litre municipal tax. prices in this market have historically mirrored those of Vancouver. This suggests that. and retail gross product margin was less than that of markets with a similar population base. This is likely due to the fact that unlike many smaller markets. the White Rock retail gasoline market displayed the same attributes as a major urban market. Price history / Taxation: Although no specific data is available. Average outlet throughputs were relatively high. Consolidated net revenue: No Ancillary or outlet cost data was available for this market. Freight costs were accordingly low compared to other small markets in this study. Influence of other markets: Although this market is a border-crossing community. Like Vancouver.630 litres 7. due to its proximity to one. The reality may be that the immediate necessity of filling one’s gas tank may often preclude a cross-border trip. the study data found little to suggest a material effect upon representation. Margin/Throughput relationship (Figure 24): gross product margin was virtually identical to that of Vancouver. MJ ERVIN & ASSOCIATES 55 .90 rank 14 rank 17 rank 14 rank* 13 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3.315 4 8 4.

Consolidated net revenue: was typical of other major markets in the study group. Geographic / Supply / Freight cost considerations: Although there is no refining capability within this market. which was one reason for selecting Calgary as a study market. Calgary pump prices are very close to the Canadian average. Margin/Throughput relationship (Figure 24): Gross product margin was very typical of other study markets with similar throughput characteristics.4 rank 4 rank 3 rank 4 rank* 9 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3.675 27 313 4. Influence of other markets: Calgary is fairly remote from US and other major markets.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Calgary Rack Price Calgary Posted Price . Some smaller markets in the vicinity have occasionally priced below Calgary. Product is usually sourced from Edmonton refineries via pipeline.23 ¢ rank 3 rank* 6 rank* 3 rank* 6 sample size 69 General: Alberta enjoys the lowest provincial product tax rates in Canada. Other considerations: Of the markets studied.Calgary population # of brands # of outlets outlets per 10. on some occasions the Calgary ex-tax RUL pump price has dropped to within one cent per litre of rack price. creating some competitive pressures (see Nanton).24 ¢ 6. This trend is largely due to a low provincial tax rate: when compared on an ex-tax basis. Calgary had the third highest number of retail brands. pump prices in this market have historically been well below the Canadian 10-city average.719 litres 6. Indeed.47 ¢ 0. Figure 29: Calgary .827.000 710. indicative of a strong competitive climate. Price history / Taxation: As the figure below shows.ex tax Canada Average .extax Calgary Posted Pump Price RUL Canadian Average Posted Pump Price MJ ERVIN & ASSOCIATES 56 . Calgary is of sufficient size to support a viable rack market. Rack-to-outlet freight costs are among the lowest in the study group.

Consolidated net revenue: was typical of other similar markets.180 15 86 4.50 ¢ 0. Figure 30: Regina . Influence of other markets: Like Calgary.089. which are among the highest in Canada.extax Canadian Average Posted Pump Price 10¢ 5¢ Apr-92 Apr-93 Apr-94 Apr-95 Apr-96 Oct-92 Oct-93 Oct-94 Oct-95 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 MJ ERVIN & ASSOCIATES 57 . Since then. price volatility has eased. supply/demand is likely more balanced. Freight costs were therefore low: Regina ranked first (least) in freight costs among the entire study group.ex tax Canada Average .21 ¢ 7. This is partly due to provincial taxation levels. Margin/Throughput relationship (Figure 24): Although gross product margin was high relative to major markets. Ex-tax prices are also above average.Regina population # of brands # of outlets outlets per 10. Regina was of some interest as a study market. Since 1993. Geographic / Supply / Freight cost considerations: Regina possesses its own refining capacity. this market has generally exhibited pump prices which are somewhat higher than the Canada 10-city average. Price history / Taxation: In the early 1990’s this market experienced frequent and pronounced price war activity.29 ¢ rank 10 rank* 8 rank* 1 rank* 8 sample size 30 General: With local refining capacity.794 litres 7.000 179. and is therefore a recognized rack pricing point. margins and throughputs were typical of other markets with a similar population base. and this market is now more typical of other large population centres. reflecting a somewhat higher than average gross product margin relative to the 10-city weighted average.80 rank 9 rank 7 rank 10 rank* 10 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. and therefore experiences no particular influences from any other major market. and a history of volatile pump prices. Although no supporting data is available. this market is removed from other significant markets. it is likely that this reflected a surplus of wholesale inventory within the local market or region.Price History 65¢ Regina Posted Pump Price RUL 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ Crude Oil Price Regina Rack Price Regina Posted Price .

Consolidated net revenue: No ancillary or outlet cost data was available for this market. possibly due to modest ancillary revenue. Margin/Throughput relationship (Figure 24): Winnipeg fell within a cluster of markets exhibiting similar margins relative to their throughputs.217 litres 8. Price history / Taxation: In the early 1990’s this market experienced some price war activity.Winnipeg population # of brands # of outlets outlets per 10. it is an established rack price point. Figure 31: Winnipeg . though somewhat higher than average ex-tax pump prices.ex tax Canada Average .000 616. this market has exhibited relatively stable pricing.23 rank 6 rank 6 rank 5 rank* 8 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. although there is no study data to support this. prices have tended to stay somewhat above the Canadian average.84 ¢ rank 8 rank* 11 rank* 2 rank* 12 sample size 61 General: The Winnipeg market is characterized by stable.790 17 261 4. and therefore experiences no particular influences from any other major market. Geographic / Supply / Freight cost considerations: No refining capacity exists within the Winnipeg market. probably related to a regional surplus of wholesale inventory (see Regina).extax Canadian Average Posted Pump Price MJ ERVIN & ASSOCIATES 58 . On an ex-tax basis.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Winnipeg Rack Price Winnipeg Posted Pump Price RUL Winnipeg Posted Price . Influence of other markets: Like Calgary. This may reflect a lower than average Consolidated Net Income. like most markets of this population density. Since then.22 ¢ 7.06 ¢ 0. this market is removed from other significant markets. although.265. and has remained very close to the Canadian 10-city average.

as Figure 24 shows. Nanton had the second lowest gross product margin of the study group. in order to maintain a share of the considerable potential sales revenue that passes through this market. Its setting on a major highway provides a significant opportunity for attracting highway motorist volume. more isolated small-town markets. and perhaps healthy ancillary sales associated with highway traffic. this market has a relatively low freight overhead.071. Consolidated net revenue: No Ancillary or cost data was available. MJ ERVIN & ASSOCIATES 59 . the Nanton retail gasoline market displayed the same price attributes as a major urban market.585 4 5 31. In this respect. While the margin data might suggest that retail gasoline operations in Nanton would not be profitable. While these conditions would normally result in a high gross product margin.far in excess of what would be expected of a community with a population of 1. Geographic / Supply / Freight cost considerations: Located within an hour’s drive of the Calgary rack. placing Nanton well below the expected margin. a feature not available to other. Price history / Taxation: In order to attract market share beyond simply the local population. situated on a major North-South highway to the United States Among the study group. it is likely that low operating costs.000 litres 5.91 ¢ 0. Nanton had a high number of per capita outlets .and a low average outlet throughput. although not as low as expected.41 ¢ 5. in terms of expected petroleum revenues.000 1. Nanton was the smallest market in terms of population. Nanton appeared to benchmark its pump prices to those of Calgary. would have an offsetting effect. Despite its small size. Average outlet throughputs were relatively low. Nanton has traditionally priced either at or below Calgary.51 ¢ rank 15 rank* 3 rank* 10 rank* 3 sample size 2 General: Nanton is a farming community approximately 70 km south of Calgary. while others experience consistently high prices.600. Margin/Throughput relationship (Figure 24): Like some other small markets in the study group.the highest of the entire group . Some unique characteristics of this market serve to illustrate why some smaller markets experience relatively low pump prices. due to its proximity to one. Influence of other markets:. This strategy has had the effect of sustaining a roughly 10 million litre per year retail gasoline market .55 rank 19 rank 17 rank 18 rank* 19 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. Alberta population # of brands # of outlets outlets per 10. Nanton was perhaps the least viable market in the study group. Unlike many of the smaller markets in this study group. the retail gasoline market in Nanton was not restricted to the local population. Due to its highway location and its proximity to Calgary.Nanton.

and was accordingly chosen as a study market.715 6 8 11.85 ¢ rank 13 rank* 16 rank* 16 rank* 15 sample size 4 General: Peace River is located at a considerable distance from the nearest source of primary supply. high pump prices. Alberta population # of brands # of outlets outlets per 10. other markets.45 ¢ 1. Supply is via tanker truck from Edmonton. isolated markets. and in fact fell into a tight cluster of four other study markets.91 rank 17 rank 13 rank 14 rank* 17 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. this market has little or no influence upon. Consolidated net revenue: No Ancillary or outlet cost data was available for this market. Margin/Throughput relationship (Figure 24): Although gross product margins in this market were relatively high.000 6. Geographic / Supply / Freight cost considerations: At 1. Peace River has among the highest freight cost in the study group. In contrast to Nanton. isolated markets. its normal rack point. they were comparable to other markets with similar average throughputs. Influence of other markets: Since it is not located on a major inter-urban thoroughfare. Price history / Taxation: Peace River is typical of small.157. the community of Peace River is subjected to a number of factors which give rise to higher than average prices. and due to its isolated locale in northern Alberta. Peace River also experiences high freight costs.6 cents per litre. nor is it influenced by. though fairly typical of many smaller.623 litres 12.Peace River. MJ ERVIN & ASSOCIATES 60 . experiencing relatively high gross product margin and consequently.6 ¢ 10. further adding to overall high pump prices.

01 rank 16 rank 15 rank 17 rank* 7 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. outlet costs were also modest typical of most smaller markets. It also experienced high freight costs. thereby creating the potential for narrower margins. the community of Thompson clearly falls into the category of a small. Consolidated net revenue: Low outlet throughputs were offset by higher margins.02 ¢ 11. high pump prices.014.1 ¢ 3. nor is it influenced by. and in fact fell into a tight cluster of four other study markets. its usual rack point.Thompson. a significant portion of which would likely be distributed towards supplier overhead costs. experiencing relatively high gross product margin and consequently.975 5 6 4. Other considerations: Like other small markets.08 ¢ rank 16 rank* 17 rank* 17 rank* 16 sample size 4 General: Like Peace River. remote market. resulting in per-outlet petroleum revenues which were quite typical of many markets. Price history / Taxation: Thompson was typical of small. and reduced pump prices. they were comparable to other markets with similar average throughputs. further adding to overall high pump prices. Although ancillary revenues were the smallest of the study group. Supply is via tanker truck from Winnipeg. the Thompson market experiences some competitive disadvantage due to its small population base and limited market potential. Influence of other markets: Since is not located on a major inter-uban thoroughfare. and due to its isolated locale in northern Manitoba. Margin/Throughput relationship (Figure 24): Although gross product margins in this market were relatively high. isolated markets. other markets. These factors resulted in relatively strong per-outlet net revenues. Manitoba population # of brands # of outlets outlets per 10. Geographic / Supply / Freight cost considerations: At 3.02 cents per litre. would have the conflicting effect of reducing the consumer’s choice in a market with a limited choice to begin with.520 litres 14. A reduction in the number of outlets might seem to be the best way to improve outlet throughput performance.000 14. This however. this market has little or no influence upon. Thompson is among the highest freight costs in the study group. Although outlets in Thompson appear to be as competitive as those of any other study market. Thompson is faced with the dilemma. MJ ERVIN & ASSOCIATES 61 .

stretching from Pickering to Buffalo.775 30 546 2. and a resultant low consolidated net revenue.275. Figure 32: Toronto . Margin/Throughput relationship (Figure 24): This market stood apart from the study group. this market ranked first in a number of measures: lowest gross product margin.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Toronto Rack Price Canada Average . and first in average throughput per outlet.3 ¢ 3. it is likely that outlet ancillary revenues are among the highest in the country.Toronto population # of brands # of outlets outlets per 10. Geographic / Supply / Freight cost considerations: Toronto has nearby refining capacity.478 litres 3. In addition. this market was consistently less than the 10-city average. This is likely offset by high operating costs. as evidenced by an exceptionally low gross product margin. Consolidated net revenue: Although no study data was available for this market.36 ¢ 0. It consequently has a low freight component. least number of outlets per capita. similar to that of Montreal. Influence of other markets: This market is continuously linked with several other major retail markets. On an ex-tax basis however.098. it had the second highest brand variety of the study group.4 rank 1 rank 2 rank 2 rank* 1 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 5. Price history / Taxation: 1995 posted pump prices in Toronto did not differ markedly from those of other major Canadian centres. an outlet pumping significantly less than the average 5 million litres annually would not be likely to generate sufficient revenue to remain viable. thus there exists a climate of robust competition.ex tax Toronto Posted Pump Price Canadian Average Posted Pump Price MJ ERVIN & ASSOCIATES 62 . and is also relatively close to wholesale supply sources in the US.extax Toronto Posted Price .06 ¢ rank 1 rank* 1 rank* 7 rank* 1 sample size 59 General: Within the study group. Within this region are thousands of retail outlets. New York.000 2. With an average “blended” gross product margin of only 3. exhibiting a lower margin than even expected of an extraordinarily high average outlet throughput.06 cents per litre.

000 678. Influence of other markets: Although Ottawa is the only major market in the immediate area. and close to the Canadian 10-city average. Price history / Taxation: Pump prices in this market were comparable to other major centres when viewed on an ex-tax basis. Consolidated net revenue: was low. Geographic / Supply / Freight cost considerations: As Ottawa is an established rack point.948 litres 5.004. Margin/Throughput relationship (Figure 24): This market had the second highest average outlet throughput of the study group with a correspondingly low gross product margin.97 ¢ 0. several smaller. rural markets co-exist in this area.ex tax Canada Average .145 19 209 3. margins and prices in Ottawa are typical of markets with similar throughput and net revenue characteristics. This would suggest that it was as competitive as any other major market of similar size and throughput characteristics. slightly lower that expected. exhibiting all of the characteristics of robust competition. Figure 33: Ottawa .29 ¢ 5.68 ¢ rank 2 rank* 4 rank* 6 rank* 4 sample size 39 General: Ottawa was very typical of major markets. ancillary revenue was slightly lower than average. Although petroleum revenues were typical of major markets. freight costs within this market were quite low. some of which have on occasion priced below Ottawa (see Nanton and Calgary). and operating costs were higher than most. in fact.08 rank 5 rank 4 rank 6 rank* 4 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 4. Other considerations: While pump prices in this market were somewhat higher than in Toronto.extax Canadian Average Posted Pump Price Ottawa Posted Pump Price RUL MJ ERVIN & ASSOCIATES 63 .Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Ottawa Rack Price Ottawa Posted Price .Ottawa population # of brands # of outlets outlets per 10.

000 81. somewhat isolated. Sault Ste Marie is a sizable market. Consolidated net revenue: This market showed the highest consolidated net revenue of the study group. This would suggest that a significant market share is being lost across the US border. Pump prices in this market were thus typical of any market with similar throughput characteristics. average throughputs were modest.73 ¢ 1. and between 5 to 8 cent per litre in gross product margin.550 litres 8. a consequence of the transport distance from the rack point. Margin/Throughput relationship (Figure 24): While this market had the third-lowest per capita outlet population of the study group (behind Vancouver and Toronto). partly due to higher freight costs. and accordingly. MJ ERVIN & ASSOCIATES 64 . Sault Ste Marie fell into a cluster of 10 study markets of between 3 to 4 million litres in average annual throughput.465.Sault Ste Marie population # of brands # of outlets outlets per 10.475 10 24 2. Freight costs are therefore high. Influence of other markets: This market is close to a US border market.51 ¢ rank 6 rank* 12 rank* 15 rank* 9 sample size 12 General: While situated at some distance from its nearest source of rack supply.95 rank 11 rank 10 rank 12 rank* 3 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3.22 ¢ 7. Price history / Taxation: Ex-tax pump prices were relatively high compared to other Ontario markets. yet with some potential for cross-border retail competition. a product of relatively strong net petroleum revenues combined with lower than average operating costs. this Canadian market has some difficulty in remaining both competitive and viable. Geographic / Supply / Freight cost considerations: Sault Ste Marie uses Toronto as its usual rack point.

and outlet throughputs of any market studied. Margin/Throughput relationship (Figure 24): Sioux Lookout’s gross product margin. MJ ERVIN & ASSOCIATES 65 . largely due to higher freight costs.000 3. despite its high prices. was much less than expected for a market of this size. This would suggest that. so that virtually all sales volume represents local demand only.06 rank 18 rank 19 rank 19 rank* 16 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 694.2 ¢ 11. This is a major factor in the high cost of gasoline in this market.066 litres 14.76 ¢ rank 19 rank* 18 rank* 18 rank* 18 sample size 2 General: Sioux Lookout was one of the smallest markets within the study group. It therefore presents some unique characteristics for the market study. and had the least number of outlets. although high.310 3 3 9. Consolidated net revenue: No data was available for this market. with little or no influence from other retail gasoline markets.96 ¢ 3. Influence of other markets: This is clearly an isolated market. in fact the second highest in the study group. Sioux Lookout is well-removed from any major highway. this market experiences a high degree of price competition. brands. Geographic / Supply / Freight cost considerations: Sioux Lookout is normally supplied from the Winnipeg rack via tank truck. An average outlet in Sioux Lookout pumped only 694. Freight costs are therefore high.006 litres in 1995. Price history / Taxation: Ex-tax pump prices were relatively high compared to other Ontario markets. one-seventh the average throughput in Toronto.Sioux Lookout population # of brands # of outlets outlets per 10.

It therefore represents a highly competitive rack market. combined with low petroleum revenues and high operating costs. with resultant low average outlet throughputs. Influence of other markets: Like Toronto.394. Price history / Taxation: As the figure shows. This. Margin/Throughput relationship (Figure 24): This market would appear to be overrepresented in outlets compared to other major markets.144 litres 5. an additional tax of 1.870 32 866 4.000 1. placed Montreal lowest of all study markets in terms of consolidated net revenue. Consolidated net revenue: Montreal outlets had relatively poor ancillary revenues compared to the major market average.3 ¢ 5.43 ¢ 0. thus promoting a competitive climate. and is also relatively close to wholesale supply sources in the US. With 32 competing brands. a function of a competitive rack market and an excess of retail outlets competing for market share.ex tax Montreal Posted Pump Price MJ ERVIN & ASSOCIATES 66 . this market ranks first of the study group in terms of brand variety. This market had the highest tax content of the study group due to high provincial tax rates (in 1996.Montreal population # of brands # of outlets outlets per 10. pump prices in this market have a tendency to be volatile.775.88 rank 2 rank 1 rank 1 rank* 11 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. On an ex-tax basis however.5 cents per litre was introduced into the Montreal area). Geographic / Supply / Freight cost considerations: Montreal has local refining capacity. pump prices in Montreal have generally been at or below the 10-city average for major markets.13 ¢ rank 7 rank* 2 rank* 7 rank* 2 sample size 74 General: As the largest retail gasoline market in the Quebec/Atlantic region. Montreal nevertheless exhibited a gross product margin which was well below that expected for these throughput attributes. this market interacts with several other markets in the region. Montreal was included in the selected market study.Price History 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Montreal Rack Price Crude Oil Price Canadian Average Posted Pump Price Canada Average .extax Montreal Posted Price . Figure 34: Montreal .

250.2 ¢ rank 12 rank* 15 rank* 13 rank* 17 sample size 16 General: The Chicoutimi area was somewhat unique among the study markets in that there is a relatively large population base.75 cents per litre. Influence of other markets: The Chicoutimi / Jonquiere market represents a sizeable population base.Chicoutimi population # of brands # of outlets outlets per 10. were quite typical of markets with similar populations. this amounted to a reduction of 5. by tank truck. for example).08 ¢ 11. a partial factor in the high cost of gasoline in this market. In the case of Chicoutimi. yet is geographically quite isolated. Margin/Throughput relationship (Figure 24): Outlet throughputs.28 ¢ 1. Geographic / Supply / Freight cost considerations: Although some markets of this size support a viable rack market (Saint John.000 120. Freight costs are therefore somewhat high. although low. but as the figure shows. Gross product margin was accordingly high. within a cluster of other markets with similar attributes. Price history / Taxation: Chicoutimi benefited from a special Quebec tax reduction which applies to certain markets in remote areas and within 20 kilometers of the provincial border. both pump and ex-tax prices in this market were higher than average. Chicoutimi is normally supplied from the Quebec city rack. Nevertheless. Consolidated net revenue: was average among the study group.605 14 97 8.04 rank 10 rank 8 rank 9 rank* 15 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. MJ ERVIN & ASSOCIATES 67 .289 litres 12. but is quite isolated from any other markets. this market has little potential as a rack market.

50 ¢ 3.88 rank 13 rank 13 rank 8 rank* 12 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 981. Nevertheless. Margin/Throughput relationship (Figure 24): This market had the second-lowest outlet throughput of the study group.17 gross product margin the highest of the study group.900 litres 17. amounting to a reduction of 5. located at a considerable distance from its rack source of supply. both pump and extax prices in this market were higher than average.400 6 13 4.33 ¢ 14. Geographic / Supply / Freight cost considerations: Gaspé is normally supplied from the Montreal rack. ancillary revenues would likely be modest. Nevertheless. Influence of other markets: This is clearly an isolated market. a product of high freight costs and gross product margins. by tank truck. This is a major factor in the high cost of gasoline in this market. a key factor contributing to its 14. this margin was only slightly higher than expected for a market with these throughput attributes. MJ ERVIN & ASSOCIATES 68 . Consolidated net revenue: No data was available for this market. Freight costs are therefore high. Gaspé is well-removed from any major highway.75 cents per litre. with little or no influence from other retail gasoline markets.17 ¢ rank 18 rank* 19 rank* 19 rank* 19 sample size 2 General: Gaspé is a relatively small market. Price history / Taxation: Gaspé benefited from a special Quebec tax reduction which applies to certain markets in remote areas and within 20 kilometers of the provincial border.000 16. Although operating costs are likely to be low in a small market like Gaspé.Gaspé population # of brands # of outlets outlets per 10. so that virtually all sales volume represents local demand only. in the case. in fact the highest in the study group.

52 ¢ rank 14 rank* 13 rank* 4 rank* 13 sample size 17 General: As a major refining centre in Atlantic Canada. do not differ markedly from any other rack point in the study group. freight costs in this market are low. the Saint John retail market is relatively isolated from other retail markets of any significance. which for Saint John. and is capable of shipping and receiving wholesale product through marine facilities. and therefore.47 rank 12 rank 11 rank 11 rank* 14 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2.095. it is an established rack point.694 litres 9. reflected in the high ex-tax pump price. this market fell within the expected range of gross product margins as a function of outlet throughput. Influence of other markets: Although rack pricing is potentially subject to influence from other Atlantic coast terminals.79 ¢ 0.ex tax Canada Average . In fact. retail pump prices are ultimately a reflection of rack prices.27 ¢ 9. Average gross product margin was consequently high. Figure 35: Saint John NB .Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Saint John Rack Price Canadian Average Posted Pump Price Saint John NB Posted Pump Price RUL Saint John Posted Price . Since provincial taxes are among the lowest in the country. resulting in lower than expected average outlet throughputs. Geographic / Supply / Freight cost considerations: Saint John is home to a large regional refiner. Accordingly.970 9 56 7. Saint John presents some unique characteristics for the market study. Nevertheless. The only real benefit that a local refinery provides is the modest rack-to-outlet freight cost factor.000 74.extax MJ ERVIN & ASSOCIATES 69 . That a major refinery resides in this market might suggest that these prices should be among the least in the country. Margin/Throughput relationship (Figure 24): Saint John is somewhat over-represented by retail outlets. Price history / Taxation: Historically. ex-tax prices were relatively high. posted pump prices in the Saint John market have closely followed the 10-city average.Saint John NB population # of brands # of outlets outlets per 10. Consolidated net revenue: was average for the study group. with or without a local refinery.

Halifax
population # of brands # of outlets outlets per 10,000 330,845 9 113 3.42 rank 7 rank 11 rank 7 rank* 5 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3,058,010 litres 6.0 ¢ 0.27 ¢ 5.73 ¢ rank 11 rank* 5 rank* 4 rank* 5

sample size 18

General: As the largest population centre in Atlantic Canada, Metro Halifax was included in the selected market study. Geographic / Supply / Freight cost considerations: This market is served by a number of regional refineries, including one situated locally. Its marine port status allows for the potential import of refined product from any one of several refiners on the US east coast or western Europe. Influence of other markets: The Halifax/Dartmouth market represents a sizable population base, with a commensurate representation of retail outlets. It is relatively isolated from other retail markets of any significance. Price history / Taxation: For a number of years until mid-1991, retail pump prices, numbers and types of outlets and pump service (full vs self-serve) were regulated by that province’s Public Utilities Board (PUB). This structure was likely responsible for the historically high pump prices that existed in this market until late 1992. Since then, pump prices have generally fallen to reflect market conditions, and have on occasion, experienced price war activity, most notably in 1996, where at times, prices fell below the posted rack (wholesale) cost. Margin/Throughput relationship (Figure 24): Halifax exhibited a gross product margin well below that expected for these throughput attributes. While product margin ranked 5th lowest in the study group, outlet throughput was disproportionately low, ranking 11th. Consolidated net revenue: No data was available for this market.

Figure 36: Halifax - Price History
65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Apr-93 Apr-94 Apr-95 Apr-96 Oct-92 Oct-93 Oct-94 Oct-95 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96
Crude Oil Price Halifax Rack Price Canadian Average Posted Pump Price Halifax Posted Pump Price RUL

Halifax Posted Pump Price - ex tax Canada Average - extax

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Charlottetown
population # of brands # of outlets outlets per 10,000 15,395 5 23 14.94 rank 15 rank 15 rank 13 rank* 18 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 1,890,648 litres 11.17 ¢ 1.14 ¢ 10.03 ¢ rank 17 rank* 14 rank* 14 rank* 14

sample size 4

General: As PEI is the only province that regulates gasoline prices, Charlottetown was included in the study group to derive some insights into its possible effect on competitiveness. Geographic / Supply / Freight cost considerations: This market receives marine supply, usually from Halifax, but often from one of several marine terminals in the region, including Saint John, Quebec city or Montreal. Influence of other markets: Due to its island setting, retail consumers have little opportunity to shop adjacent markets for the lowest-priced gasoline. Price history / Taxation: Charlottetown has perhaps the consistently highest ex-tax pump price of any urban market in Canada. Margin/Throughput relationship (Figure 24): Charlottetown is probably over-represented by retail outlets, resulting in lower than expected average outlet throughputs. Average gross product margin was consequently high, reflected in a high ex-tax pump price, although it was comparable to other markets with similar throughputs. Consolidated net revenue: No data was available for this market. It is unlikely that the removal of price regulation would result in pump prices any higher than already exist in this market. Competitive disadvantages which exist in PEI markets are shared with many other non-regulated markets which exhibit a pattern of lower prices. Therefore, there is likely no consumer benefit, and there may be some detriment attached to the PEI regulatory structure, as evidenced by its pricing history and that of Halifax. Finding 22: Some instances of direct government intervention into petroleum marketing have been shown to have a possible adverse effect on competitiveness, and likely a negative impact on consumers.

Figure 37: Charlottetown - Price History
65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jul-92 Jul-93 Jul-94 Jul-95 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96
Crude Oil Price Halifax Rack Price Canadian Average Posted Pump Price Charlottetown Posted Pump Price RUL

Charlottetown Posted Price - ex tax Canada Average - extax

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Part E

Findings, Conclusions & Recommendations
This Retail Petroleum Markets study meets the study objectives of: • • • • providing a sound database for policy direction; providing a means to better understand competitive opportunities and challenges; assessing the viability and competitiveness of regional markets; and determining key competitiveness factors in specific markets.

The study thus provides a tool to understand the dynamics of this vital and complex industry, and a foundation for effective policy development.

Findings
This study presented twenty-two findings which are derived from the pump price model analysis, historical evaluation of pump prices and margins, and specific market analysis: Finding 1: Refiner and Marketing Margins are a consequence of their defining prices, in turn determined by competition on a continental (Rack Price) or a local (retail pump price) scale............................................................................................. 7 Finding 2: 1996 average crude price, as a factor of the regular gasoline retail pump price, was 19.1 cents per litre, or roughly 34 percent of the pump price................... 9 Finding 3: The infrastructure of the Canadian refiner sector provides the necessary conditions required for competitive, market-driven Rack (wholesale) pricing of petroleum products................................................................................................... 11 Finding 4: In 1996, petroleum taxes accounted for 50.3 percent of the average urban price of regular gasoline in Canada................................................................ 17 Finding 5: In 1996, the average Gross Refiner Margin available to Canadian petroleum refiners to provide for all operating costs and profits on the manufacture of regular gasoline, was 5.3 cents per litre............................................................... 17 Finding 6: In 1996, the average Gross Product Margin available to Canadian petroleum marketers to provide for all operating costs and profits on the sale of regular gasoline in a typical urban market, was 3.5 cents per litre. ......................... 17 Finding 7: Price uniformity and price volatility, facilitated through street price signs, are indicators of a competitive market........................................................... 21 Finding 8: Some competitiveness inhibitors may exist in the retail gasoline market which are regulatory in nature, but exist to meet other important societal needs.... 23 Finding 9: Pump prices are established by the local dealer at over half of all retail outlets in Canada. ..................................................................................................... 28 Finding 10: Gasoline has remained at or below the “all items” Consumer Price Index nine out of the past ten years.......................................................................... 31

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........ ........ while those with high Gross Product Margins tend to have low outlet throughputs............. given the possibility of discounts from posted rack prices and potentially lower overhead costs................................ ....................... and likely a negative impact on consumers............................... petroleum sales revenues alone were insufficient to cover operating costs for the 481 outlets studied.............. 43 Finding 17: Market-specific differences in product freight are a key factor in intermarket ex-tax pump price differences.............................. remote population centres.............. .... reduced pump prices............................... The viability of the Canadian retail gasoline sector as a whole may be somewhat better..... 45 Finding 18: After accounting for differences in taxation and freight the remaining difference in retail pump prices between markets is very closely linked to market differences in average sales volumes such that markets with low Gross Product Margins are associated with high outlet throughput volumes..... a feature of most market-regulated commerce.. the profitability of the 481 outlets studied appears only marginal.... In effect............................................................ 52 Finding 22: Some instances of direct government intervention into petroleum marketing have been shown to have a possible adverse effect on competitiveness......... which in turn... 71 MJ ERVIN & ASSOCIATES 73 .......................... 37 Finding 16: Provincial differences in product taxation are a predominant cause of inter-regional pump price differences................................... .... are principally a reflection of changes in the underlying price of crude oil... the residual represented a net loss to the supplier.... 48 Finding 19: Based on published rack prices................. 32 Finding 12: Retail pump price increases from 1994 to 1996 are wholly attributable to increases in petroleum product taxation and crude costs......... .............. while average combined Gross Refiner and Gross Marketing Margins decreased by about 7 cents per litre................ 33 Finding 14: Canadian retail gasoline pump prices are the competitive equal to those of the US. 35 Finding 15: Seasonal fluctuations in retail pump prices are ultimately linked to wholesale product inventory levels.... after the average 1995 consolidated revenues were distributed to meet dealer income and the supplier’s marketing overhead requirements....................Finding 11: Retail pump price trends are principally a reflection of changes in the underlying rack (wholesale) price of petroleum products............................... when compared on an ex-tax basis.................... which ensures a competitive product price for buyer and seller alike....... ...... 33 Finding 13: From 1991 to 1996................................. The study average retail gasoline outlet would have experienced a net loss without the contribution of ancillary operations.. 50 Finding 20: For the 481 individual outlets studied................51 Finding 21: Based on published rack prices and the individual outlet data.................... these ancillary operations contributed to a lower product margin and consequently................ the average tax content of regular gasoline pump prices in major Canadian cities increased by about 5 cents per litre.................................... residuals for outlets not studied may be better.... particularly in comparisons of major urban markets to small............... Taking into account the possible discounts from posted rack prices and independent brands’ lower marketing overheads..........

which at times can decline to very low or MJ ERVIN & ASSOCIATES 74 . • • These findings are likely in sharp contrast to a common public perception of this industry in general and price trends in particular. over the long term. place. which also serves to illustrate the interrelationships between the various stakeholders who ultimately receive the revenue from the sale of a litre of gasoline. The Canadian retail petroleum products industry. was shown to be strongly competitive: • A long-term decline in pump prices. 2. a variety of available data suggests that a state of vigorous competition exists in the Canadian petroleum marketing sector. The resultant margins.Conclusions The study findings lead to a number of conclusions relating to the competitiveness of Canada’s petroleum marketing sector. The contrary notion that a given refiner or marketer is free to establish a price based upon a minimum margin requirement. the very margins within which this industry operates has. each with unique dynamics. Canadian prices have been at or below US prices in recent years. in comparing Canada average (city) pump prices to those of the United States. Although an objective measure of competitiveness is elusive. Closer examination of these strategic tools might yield additional insights into the nature of competition in this industry sector. Virtually all of the competitiveness indicators examined in this study relate to price. by all objective measures available to this study. On a national level. The economic relationship of the petroleum marketing sector with its related stakeholders is a complex one. exhibited a diminishing trend (Finding 13). Critical to the overall success of this study was the development of a model which would create a common frame of reference for the considerable terminology that accompanies an industry as complex as Canada’s petroleum sector. was observed (Finding 10). and promotions are the other three). 1. This has not simply been a result of a decline in underlying raw materials costs. As described in this study however. when measured in constant and nominal dollars. In comparing several diverse markets. a consistent pattern of competitiveness emerged when comparing product margins to their associated average outlet throughputs (Finding 18). when taxes were excluded (Finding 14). price is but one of four competitiveness “tools” available to marketers (product. This price/margin model illustrates that the various sector margins are a consequence of the prices at which feedstock or wholesale product is bought and then sold (Finding 1). Rack and pump prices are determined in competitive marketplaces. The study presents such a model. is mistaken.

since this is the effective range of consumer choice. for example) were rationalized. The demonstrated exception to this is in markets directly adjacent to nearby US markets. it is important to understand that. Petroleum product taxes are levied at the federal. Due to the localized nature of competition in the retail gasoline marketing sector. taxation as an element of public policy is an area worthy of additional research. generally do not serve as competitiveness inhibitors. while crude oil markets are considered global in scope and rack product markets are considered regional in scope. these markets have managed to sustain a certain level of viability and competitiveness. an exercise that consumers are unlikely to engage in. but even in such cases. the resultant margins were found to display a distinct relationship with average outlet throughputs for each market. Dealers were shown to have a variety of relationships with their supplier.5 cents. The measurement and analysis of the effect of petroleum taxation levels in Canada compared to other countries is well beyond the scope of this study. provincial.even negative values. municipal levels of government. and in some markets. and accordingly. 3. Taxation is a significant factor in the price of retail gasoline. or even between Canadian markets with differing tax structures. refiner margins accounted for 5. This study’s analysis of NRCan urban regular gasoline prices shows that the tax content in a typical consumer’s gasoline purchase is about 50 percent (Finding 4). but given its magnitude. By contrast. or 6 percent (Finding 6) of the 1996 average regular pump price. MJ ERVIN & ASSOCIATES 75 . demand and other competitive factors existing at the time. The latter two can vary considerably from one market to another. well over half of all outlets in Canada operate as lessees or independents. when the “outside” factors (tax. While some markets. but not beyond the reach of any organization wishing to truly understand petroleum competitiveness issues. This would entail the tracking of not only pump price. measured against the average outlet throughput for that market. particularly smaller ones. presents a competitive disadvantage to Canadian marketers. but also rack prices and outlet performance. the responsibility for deciding upon retail pump prices was shown to reside principally at the local dealer level (Finding 9). and are a predominant cause of inter-regional pump price differences (Finding 16). and do. and in some markets.3 cents or 9 percent (Finding 5). experienced higher than average pump prices. This implies that the competitive dynamics pertaining to these retail markets can. taxation differences between Canadian and US markets. rack price and freight cost. vary considerably from one population centre to another. crude costs accounted for roughly 34 percent (Finding 2). A much more accurate barometer of industry competitiveness would therefore be the rack-to-retail or gross product margin. and product margins accounted for 3. are thus a reflection of the state of product supply. retail petroleum markets are considered local (municipal) in scope. In applying such a model to the retail petroleum marketing industry.

on the basis of price fluctuation alone. The pump price/margin model shows that in 1996. is available to provide for all retail marketing operations including outlet costs. This consolidated outlet revenue. MJ ERVIN & ASSOCIATES 76 . Retail gasoline marketing revenues. Sioux Lookout. showed a close relationship to underlying crude prices (Finding 11). This study’s marginvolume model could detect no difference between price-volatile markets such as Toronto. reflecting consumer demand behavior (Finding 15). which represent the majority of Canada’s population base. Pump price fluctuations can be an indicator of competition in the marketplace.5 cents per litre on the sale of regular gasoline in a typical major urban market (Finding 6). the Canadian retail marketing sector realized an average gross margin of 3.Canadians nevertheless enjoy one of the lowest average gasoline taxes in the industrialized world. In fact. incorporated with ancillary revenues and outlet costs. supplier costs and profitability. on a per litre basis. constitute a small portion of the retail pump price. This relationship between price and demand was cited as the essence of competitiveness in the petroleum rack marketplace. exhibited competitive traits typical of any of the study markets. Demand for gasoline was shown to vary significantly according to the time of year. dealer income. translates into supplier profits of an estimated one cent per litre of petroleum sales in the case of smaller markets. when examined on the margin-volume model. in a highly distinct. when distributed these three ways (Finding 20). While price wars are undoubtedly an indicator of competitiveness. further suggesting that a strongly competitive environment exists in the refiner sector as well (Finding 3). which in turn is the principal driver of ex-tax pump prices. 4. This margin represents gross revenue (after wholesale product and freight cost) which. the absence of price war activity does not imply a lack of competitiveness. second only to the United States. While these findings are somewhat qualified in terms of this study’s use of posted rack prices as the derivation basis. Retail pump prices showed a corresponding seasonal pattern. it can still be concluded that the petroleum marketing sector constitutes a small portion of the total retail pump revenue distribution. fluctuating prices are a strong competitiveness indicator (Finding 7). Rack prices were shown to not significantly differ between major centres. a price-stable market. which in turn. Viewed from this perspective. Retail pump price changes showed a close relationship to underlying rack prices. 5. and more price-stable markets such as Sioux Lookout. predictable seasonal pattern. and a loss in the case of urban markets.

not price. Industry profitability is extremely sensitive to very small changes in pump price. Nevertheless. Thus.6. if Canadian average pump prices were only one cent higher than they were in 1995. This trend has both resulted in. serve as perhaps the most significant indicators of competitiveness in the downstream industry. It is likely that regional and nonrefiner marketers operate with somewhat smaller overhead costs than those used in this study. While these economics might appear to place this industry in a position of poor viability. and the marketing sector in particular. and the associated industry initiatives which are ongoing in nature. but to increases in underlying rack prices. despite increases in tax content and crude costs (Finding 12). Changing conditions in Canada’s downstream petroleum sector have caused retail pump prices to remain relatively flat since 1992. Thus. emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. Also. and has been a result of. improving retail outlet performance through outlet rationalizations (closures) resulting in higher unit throughputs (sales volumes). most outlets used in the 19-market study represent major integrated oil companies. crude costs. Also. MJ ERVIN & ASSOCIATES 77 . the combined downstream (refiner and marketing) margin in Canada decreased by about 7 cents per litre (Finding 13). Indeed. Both the downward trend in margins. not excessive profits. this industry sector would have realized profits of unprecedented proportions. the rack price basis used in this study probably understates actual revenues by about 1 to 2 cents per litre. including: • • • improving production efficiency through refinery plant rationalizations (closures). intense competitive pressures in the downstream industry in general. although pump prices in some markets can fluctuate by several cents per litre in the course of a week. pump price signs are particularly ineffective as a barometer of petroleum marketer competitiveness and profitability. A truly objective barometer of downstream industry influence on retail pump price lies in the measurement of margin. Since 1991. these findings clearly show that pump price increases are ultimately linked not to increased profits. profit margins in this sector can be stated to be in the order of 1 to 2 cents per litre in a “good” year. and in turn. despite the predisposition of many observers to use them as such. 7. both of which are beyond the direct influence of Canada’s oil companies. and have resulted from. have caused. in the long term these fluctuations are likely more reflective of market restorations. several competitive strategies. Annual residual profits available to petroleum marketers is in the order of perhaps one cent per litre. based upon an assumed posted rack price. Declining refiner and marketing margins. assuming all other costs were unchanged.

MJ ERVIN & ASSOCIATES 78 . more isolated markets are generally higher than in larger centres. Outlet throughput is a key determinant of inter-market pump price differences. had petroleum margins which were commensurate with average outlet throughput for that market. When these margins were compared to their corresponding outlet throughputs. thereby improving petroleum volumes and ancillary revenues at the remaining sites. reduce pump prices. Low ancillary revenues Outlets in smaller centres received significantly less ancillary revenue than their group A counterparts. virtually all of the 19 study markets exhibited similar levels of competition. A wide range of petroleum gross product margins were evident within the 19market study group. reducing the number of outlets may also reduce the number of competitors. This was due to three factors: • Low average outlet throughputs The average group B outlet sold approximately 1.8. While competitiveness in most smaller markets was shown to be as active as in larger centres. In suggesting this approach however. regardless of size. isolated markets face particular challenges: although found to be highly competitive. poor outlet throughputs were generally the predominant factor. Smaller. other factors exist which contribute to relatively high margins and prices. in order to generate sufficient revenue to cover the outlet’s fixed operating costs. average pump prices were relatively high. from 3 cents per litre in Toronto to 14 cents per litre in Gaspé. although this study provides comprehensive evidence of this. This created some economic pressure to sell product at a higher pump price. 9. which should.5 million fewer litres of gasoline than a group A (major centre) station. the solution would be to encourage some dealers to exit the market. • • At first glance. That such a relationship should exist was not surprising. High distribution costs Smaller markets are generally further removed from their source rack point than larger centres. likely due to the different geographic and lifestyle differences that exist in small communities compared to major cities. a distinct pattern emerged: an inverse relationship between retail gross product margin and the average outlet throughput associated with that market (Finding 18). Thus. The costs of most consumer goods in smaller. most markets. it would seem that if local government in smaller markets were interested in lowering pump prices. and therefore suffered an additional distribution cost disadvantage of about 2 cents per litre on average (Finding 17). Although some smaller markets appeared to have higher gross product margins than larger markets. according to the margin-volume model. and this study showed that gasoline prices were no exception. there are three points to consider: • In very small markets. When plotted against the margin-volume model. which could actually inhibit competition.

This competition then. depressed petroleum revenues below that of outlet operating costs. • The particular competitiveness and viability issues facing smaller markets is an issue worthy of further study. characterized by narrow product margins and relatively flat pump prices. and the perceived effect on their markets. Charlottetown. the Halifax market. The federal Competition Bureau for example. Retail ancillary operations are a critical element of petroleum price competition. and likely others in Nova Scotia. and in turn. This is not to say that all direct government intervention into marketing practices is certain to produce undesirable results. is viewed as an agency which exists to the benefit of industry and consumer alike. Some impediments to market exit may exist in the form of petroleum underground storage tank regulations which may present to the operator the option of pumping gas as the better alternative to decommissioning the site and possibly incurring prohibitive remediation costs. MJ ERVIN & ASSOCIATES 79 . Non-petroleum revenues at retail gasoline outlets will continue to gain prominence. is well beyond the scope of this study. A full analysis of the various features of the Nova Scotia and PEI regulatory structures. Government intervention into petroleum marketing is likely a poor alternative to market-based regulation. many national and local environmental regulations exist for good cause. This will be driven by the depressed petroleum product margins which currently exist in the petroleum marketing sector. as marketers find even more innovative ways to attract market share. the degree of price competition in the retail petroleum has in effect. has seen a decline in pump prices relative to other Canadian markets. Convenience store.• A full-serve retail gasoline outlet typically employs 3-5 staff. The 19-market study provides some insights into the issue of whether or not regulated retail gasoline markets serve to benefit consumers (Finding 22). The loss of employment represented by a station closure may be of some concern to smaller communities. and as such. and the traditional automotive service bay. under the current PEI regulatory structure. in order to build upon the findings in this study towards a full understanding of the dynamics at work. is both the cause and consequence of increased activity in ancillary operations. 10. are an acceptable limitation on pure competition (Finding 8). will likely preserve a highly competitive petroleum market. does not appear to benefit in consumer terms. were cited as examples of ways in which outlet petroleum sales are augmented by other revenues. 11. Also. car wash. As these findings show. Ancillary or non-petroleum revenue is described as an increasingly important feature of the retail gasoline marketing demography (Finding 19). The historical record is clear however: since deregulating pump prices.

and the converse image held in much of the public domain. 1. Public perception measurement. • • Would this enhance the competitiveness of this sector? It is felt that better public understanding of this industry’s record of competitiveness. This study alludes to several potential study initiatives which go well beyond the objective of public awareness and may assist both the public and private sector policy and strategic directions: MJ ERVIN & ASSOCIATES 80 . would ultimately be reflected in carefully-considered public policy which serves to truly enhance. margins and competitiveness factors. possibly to the detriment of the consumer. Develop cooperative industry research into marketing sector competitiveness issues. A regular comprehensive competitiveness evaluation. Ways in which this gap can be closed might include: • Ongoing third party evaluation of prices. and the nature of competitiveness influences. A recurrent theme arising from this study’s conclusions is the likely gap that exists between the demonstrably high level of competition within this industry sector. petroleum marketing competitiveness. in a simple format designed for consumers and legislators. This should be in the form of a quarterly summary of price trends and related measurements.This study proposes rather. This study might be used as the concept basis for a comprehensive annual update of price/margin trends and selected market competitiveness research. Individual companies within the retail petroleum industry have been reluctant to speak directly to the issue of gasoline pricing and competitiveness. as it does in the Canadian petroleum marketing sector. Research into the specific competitiveness issues of concern to consumers would provide valuable direction for groups conducting industry competitiveness research. 2. direct regulatory interventions may have an adverse effect on competitiveness. Organizations such as the Canadian Petroleum Products Institute and the Petroleum Communication Foundation would therefore have an expanded role to play in commissioning and regularly disseminating the results of these recommended initiatives. Improve public understanding and awareness of competition in the petroleum marketing sector. not inhibit. Industry and government have an opportunity to continue to work together in cooperative research similar to that which this study represents. Recommendations This study advances two recommendations to enhance the existing competitiveness in Canada’s petroleum marketing sector. that where a healthy competitive climate exists.

MJ ERVIN & ASSOCIATES 81 . and regulators alike. A better comprehension of the true issues and opportunities facing this industry would be an important step in the right direction towards stable and effective policy. and in particular. using Canadian and foreign selected markets. Marketing Strategy Effectiveness: Research into price and non-price marketing strategies and their relative influence on consumer response. by industry. along the lines of the model used in this study. using Canadian and foreign selected markets. Small Market Competitiveness: Detailed research into small market outlet economics and competitiveness. • • • • * * * Better understanding of this industry. the possible effect of underground storage tank legislation as a potential barrier to market exit and competitiveness inhibitor. Regulatory Intervention: Historical and theoretical research into government regulation of petroleum markets. is vital if Canadians are to put in place the structures that truly meet their social and economic needs. Lack of understanding of this industry can lead to misguided policies which benefit neither the industry nor the consumer.• Price/Margin Modelling: Development and adoption of a standard price model and associated terminology by industry/government. consumers. using Canadian and foreign selected markets. Taxation: An analysis of taxation levels on industry and consumer behavior and as a tool of policy and revenue. and issues/opportunities facing such markets.

Appendices MJ ERVIN & ASSOCIATES 82 .

such as a major oil company or regional refiner/marketer. Downstream . independent dealers. and in some regions.. Excise Tax . service bays. diesel. Ex-tax Pump Price . etc.a service provided in addition to the basic retail petroleum sales operation. and therefore purchases its supply of petroleum product from an outside source. and included in the retail pump price. an association of petroleum refiners and marketers.the retail price of gasoline that would be displayed if all product taxes were removed. GST. for example. MJ ERVIN & ASSOCIATES 83 . The ex-tax pump price is exclusive of these taxes. Margin . These product taxes include Excise tax.a petroleum organization involved in both the refining and marketing of petroleum products which has marketing operations in most or all of Canada’s provinces.an organization who sells refined petroleum products to end-use consumers. such as convenience goods. safety and business issues.a generic term referring to a retail outlet operator. Major Oil Company . health. Lessee . generally expressed in cents per litre. Dealer . Integrated Oil Company .the difference in pump price between a premium or mid-grade of gasoline vs.the segment of the oil industry involved in the refining and/or marketing of petroleum products such as gasoline. in cents per litre. Distribution Costs . such as a retail gasoline outlet. provincial pump tax. CPPI .I Glossary of Terms Ancillary service . etc.. Independent Petroleum Marketer . and purchases petroleum products from the same supplier for resale at a pump price determined by the lessee. currently established at 10¢ per litre. the regular unleaded pump price.a petroleum marketer who is not involved in the refining of petroleum products.Canadian Petroleum Products Institute.a federal tax on retail gasoline purchased by domestic (ie: motor vehicle) consumers. such as lessees. Grade Differential . municipal tax levees. of transporting petroleum product from the rack point to the final point of sale.a petroleum marketer which is involved in both the upstream and downstream aspects of the oil industry. which serves as the voice of the petroleum products industry in Canada on environment.(for the purpose of this study) the cost. but inclusive of any corporate taxes on earnings. and commission dealers. lubricants. There are several modes (see below) of dealer operation.the difference which exists between net sales and the cost of merchandise sold and from which expenses are usually met or profit derived. Marketer .a particular mode of retail petroleum operation where the outlet operator (dealer) leases the retail outlet from the product supplier. Usually expressed on a per-unit basis. car wash.

an organization who. Regional Refiner/Marketer . these can be broadly classified as company operated.the segment of the oil industry involved in the exploration and/or production of crude oil. and independent dealer.the point at which title to refined product is transferred from the refiner to the supplier.Mode . In the retail gasoline sector. the raw material from which petroleum products are manufactured. This may be at a refinery loading terminal. Upstream . Throughput . Although in theory the transfer price could be set at any arbitrary value. lessee. usually per month or per year. it is usually based on the market-driven rack price. MJ ERVIN & ASSOCIATES 84 . Supplier .the type of contractual relationship between the supplier and the dealer (outlet operator).the volume (ie: in litres) of petroleum sold at a retail outlet in a given period.within the context of retail gasoline marketing. the supplier has initial title to the petroleum product as it leaves the rack point.the wholesale price posted at the rack point. an association of upstream and downstream oil companies and related organizations.Petroleum Communication Foundation. with a non-advocacy mandate to improve public awareness of Canada’s petroleum sector. Rack Price . commission dealer. PCF . or at one on several loading terminals (usually in major population centres) where petroleum is marketed to non-refiner supplier/marketers at posted rack prices.a petroleum organization involved in both the refining and marketing of petroleum products which has marketing operations in a limited number of provinces. Refiner . Rack Point . Transfer Price .the internal price paid by an integrated refiner/marketer to its own refinery for refined petroleum products. manufactures (from crude oil) a range of petroleum products suitable for consumer use. is typically also the brand name owner of the chain of gasoline stations to which it supplies refined petroleum products.

1986 Constant (¢/litre) (3) 1986 100 100 100 100 100 100 100 100 100 100 100 47.7 22.2 20.3 55.4 136.7 95.II Source Data Tables Table A: CPI Index: Selected Goods and Services Year **All Items** (1) Food Shelter Natural Gas Fuel Oil Telephone Gasoline Auto Repair Alcoholic Beverages Domestic Water Domestic Electricity RUL Annual Price.5 115.0 1988 108.1 120.8 108.8 130.2 30.5 126.7 Note 1 Note 2 Note 3 Price Index data is from Statistics Canada Cat.2 49.6 133.9 118.3 125.4 53.2 45.1 104.3 1989 114.4 104.8 93.5 111.2 109.1 1990 119.5 94.8 94.3 115.4 34.4 57.3 141.8 95.9 108.1 105.1 126.6 91.7 123.9 122.3 139.7 29.5 49.6 136.0 93.2 127.5 124.0 32.5 25.6 107.6 92.9 26.8 28.4 124.3 96.1 117.7 132. No.9 1993 130.8 106.1 144.2 92.7 96. using a weighted (by provincial gasoline demand) 10 city average.0 93.3 27.2 39.1 26.6 122.3 160. Nominal (¢/litre) (2) RUL Annual Price.9 97.3 52.7 118.9 1995 133.4 97.0 111.4 152.7 30.1 103.3 134.7 54.3 151.1 97.2 112. Nominal (¢/litre) (2) RUL Ex-tax Price.4 120.4 122.1 40.2 121. Nominal RUL (Regular Unleaded) price and ex-tax price is from Natural Resources Canada.4 45.3 1992 128.3 40.5 145.0 102.1 48.1 117.8 1987 104.4 104.2 142.8 132.4 27.3 132.5 112.0 1991 126. Constant dollar RUL gasoline values were derived by applying the “All Item” CPI to the nominal price for that year.1 167.7 122.1 115.0 42.3 119.0 19.4 110.3 19.1 87.4 134.5 30.1 151.4 29.5 120.9 155.8 47.0 30.2 50.1 120.5 100. MJ ERVIN & ASSOCIATES 85 .2 99.2 133.0 115.2 45. 62-010: Consumer Prices and Price Indexes.3 122.1 146.8 135.9 1994 130. 1986 Constant (¢/litre) (3) RUL Ex-tax Price.0 104.0 135.8 104.2 31.9 115.3 58.1 104.9 26.6 51.7 124.0 97.

8 33.9 53.0 24.4 34.1 39.8 29.9 24.9 15.8 13.5 23.4 21.1 5.6 13.8 16.8 24.4 20.3 54.3 66.9 6.Regular Gasoline RUL Canada Avg Jan-90 Feb-90 Mar-90 Apr-90 May-90 Jun-90 Jul-90 Aug-90 Sep-90 Oct-90 Nov-90 Dec-90 Jan-91 Feb-91 Mar-91 Apr-91 May-91 Jun-91 Jul-91 Aug-91 Sep-91 Oct-91 Nov-91 Dec-91 Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Pump ex-tax Rack Crude Price Pump 10 city Avg Edmonton 30.5 30.2 7.3 12.7 32.4 31.2 63.6 24.1 16.6 52.1 53.7 29.5 14.3 25.7 4.2 6.6 25.7 7.9 25.4 26.7 31.2 27.2 13.4 24.6 6.5 57.4 55.8 8.0 52.7 23.4 8.3 26.4 14.0 26.3 13.7 14.4 31.7 24.0 4.6 28.3 23.6 25.7 4.9 22.8 55.9 26.5 6.7 4.8 9.1 18.6 23.4 13.9 17.2 8.7 14.5 14.9 6.2 14.0 16.9 55.5 Gross Marketing Margin Gross Refiner Margin 53.6 54.0 24.8 55.5 10.3 5.9 53.Table B: Key Price / Margin History .8 15.4 30.2 24.2 12.2 6.8 8.9 56.9 6.4 29.3 42.8 14.4 14.7 7.2 21.1 13.2 7.7 6.8 23.9 25.2 27.1 16.6 18.0 26.5 22.9 14.2 41.9 30.0 10.3 13.0 14.8 53.0 22.3 13.3 9.7 8.7 14.2 26.0 9.3 6.0 54.1 7.2 13.7 58.5 54.0 25.5 56.1 23.5 31.9 21.5 7.7 15.6 13.5 33.6 5.8 26.5 27.5 16.3 15.8 57.0 24.7 14.5 11.3 17.2 7.7 29.6 54.1 7.9 25.4 32.2 56.4 13.0 16.9 56.8 30.0 16.1 22.2 5.4 9.5 10.4 14.9 23.1 52.4 56.1 9.3 24.4 7.0 24.5 7.5 15.9 25.3 56.4 24.2 15.2 27.1 23.2 29.8 28.1 16.0 25.8 23.5 23.0 33.6 23.7 19.0 24.1 21.9 8.0 13.6 26.1 19.5 32.5 27.0 5.2 25.3 4.3 6.4 12.0 15.0 12.7 63.7 7.9 7.3 58.5 5.9 14.9 25.1 25.8 21.9 58.8 22.2 16.4 15.9 4.7 39.4 14.3 15.2 4.0 7.1 23.7 29.0 55.0 24.0 20.3 Tax Content 23.7 13.2 26.5 28.8 11.2 14.5 19.6 54.6 26.0 24.3 13.3 13.2 23.9 23.5 8.9 31.5 35.4 MJ ERVIN & ASSOCIATES 86 .2 13.3 26.3 22.5 23.9 12.7 14.5 26.7 34.9 9.4 58.4 53.4 26.7 18.2 23.7 12.3 14.6 21.2 7.6 20.7 28.1 29.9 54.3 22.9 11.1 22.4 57.1 16.9 23.5 26.5 25.0 7.6 8.3 54.2 65.8 14.2 25.0 26.1 13.4 22.8 53.9 13.0 16.2 13.8 14.9 55.3 56.9 7.1 24.4 33.1 53.7 25.7 33.9 7.2 22.7 Downstream Margin 14.0 7.6 9.0 8.1 13.8 14.6 4.6 26.3 54.7 18.9 26.0 28.9 4.1 17.2 16.8 21.8 25.3 57.4 26.8 26.1 18.6 7.2 11.7 19.

1 51.7 53.2 7.8 52.7 29.0 29.RUL Canada Avg Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Jan-96 Feb-96 Mar-96 Apr-96 May-96 Jun-96 Pump ex-tax Rack Crude Price Pump 10 city Avg Edmonton 26.2 20.1 61.5 17.4 5.3 4.1 source: Natural Resources Canada MJ ERVIN & ASSOCIATES 87 .1 16.8 23.1 21.4 15.0 53.2 49.5 11.8 6.0 11.5 6.5 21.2 14.5 25.3 25.0 28.2 54.6 5.2 14.6 4.7 5.7 13.0 25.3 4.3 6.5 15.4 26.7 6.1 57.7 16.0 28.1 26.1 15.2 26.1 6.2 12.5 19.0 6.1 11.1 14.4 28.4 6.6 23.7 25.4 4.2 4.2 7.0 28.3 26.8 28.0 52.4 11.1 Tax Content 26.4 25.5 28.1 55.6 53.1 11.9 5.3 26.5 14.5 4.9 27.5 2.4 6.9 Downstream Margin 12.9 4.7 52.1 26.5 54.0 54.5 7.4 25.3 9.4 13.3 28.6 17.7 18.1 26.1 15.3 21.8 27.3 26.9 14.5 5.5 3.1 Gross Refiner Margin 7.7 51.4 6.8 10.7 12.7 24.1 6.2 20.6 53.5 21.8 49.3 53.0 6.6 12.8 4.5 21.8 25.4 26.3 26.3 4.2 5.5 7.6 11.3 23.1 54.4 16.0 25.5 6.8 22.5 9.7 53.3 26.0 5.6 10.1 15.7 13.0 9.5 53.3 21.0 28.9 4.0 6.4 6.7 26.1 11.9 28.6 20.7 7.2 26.3 26.0 12.0 26.1 6.5 19.2 7.4 7.3 28.2 25.6 19.5 13.2 14.6 27.6 20.6 15.9 12.9 19.5 23.1 3.0 26.2 11.4 26.3 8.9 27.9 9.9 29.1 10.9 17.7 15.3 58.9 49.5 6.3 7.7 26.0 5.6 10.9 29.9 14.3 54.0 14.4 21.1 11.1 14.9 26.2 Gross Marketing Margin 4.0 14.0 24.4 51.7 5.3 12.5 3.7 14.7 25.6 9.8 28.8 17.9 11.5 13.0 9.7 23.0 27.9 49.2 27.1 20.9 12.2 9.6 15.7 3.2 26.2 23.1 51.3 55.6 3.7 24.5 11.6 21.7 7.0 28.6 4.3 26.9 6.3 27.4 26.2 15.6 16.1 6.7 8.2 7.7 14.9 58.2 25.4 21.3 13.9 23.3 9.2 4.3 26.7 3.7 53.3 26.8 50.9 3.7 6.8 29.0 57.5 55.8 23.3 9.4 32.5 5.5 20.0 12.1 14.2 28.3 7.8 20.1 24.4 24.

688.498.160 3.131.667 2.970.415 2.3 Canada Avg RUL Rack Price (¢/l) 35.628 3.833 2.122.973.250.379.887.830.3 26.294.558.853 2.521 2.589 3.9 29.9 26.345.890.897 3.311 3.682 3.218.070.900.864 2.122 2.218 3.180 2.604 2.671.682.469 4.Table C: Canadian Supply.299.801.429 2.9 23.502 2.625 2.2 22.869 2.316.366 2.2 24.245.461 3.089.044 2.621.2 27.2 26.035 2.654.361.839 2.2 29.2 21.4 22.743 2.263.938.3 24.716.2 26.976.633 2.389.779 2.479 2.827 3.4 25.636.5 27.633.897 2.739.056 3.609.703 2.7 34.813 2.114 3.979 2.300.019.6 23.443 2.030.627 2.672.458.242 2.952.246 2.338 3.5 32.039.462.7 24.620 3.346.771 3.037 2.709 2.455.412 2.476.020 2.045 2.622.669.773.859 2.544 3.516.6 26.933 3.799.720 3.6 28.7 31.027 2.5 30.501.876.9 22.499 2.070 3.254.287 2.378.323 3.325 2.748.439.373.287.182 3.206.796.081.9 17.473.1 29.202 3.095.5 22.202.3 22.2 27.599 2.029 2.844.130 3.281.331 2.775.120.564 2.644 3.161.8 28.301.101 2.180 3.831.025.636.4 29.518.661 Canada Avg ex tax RUL pump price (¢/l) 39.457 2.810.370 2. Inventory.729.102.5 19.873.191 2.6 24.874 3.133 3.045.508.315 2.168 2.767.067.321.268 2.823.113.254 2.295.735.369 2.802 2.480.2 27.684 2.837.151.7 21.256 2.322 3.180.853.626.047 2.369.572 2.934.714.886 3.970.8 30.313 2.298 2.630.958.1 16.427.894.801.637 3.5 28.8 29.429 2.326.782 3.011 2.291.403 2.2 27.199 2.108.176 3.840.4 24.880 Canadian Retail Gasoline Sales (M3) 2.477.9 19.456 2.7 29.843.904.193 3.7 29.4 31.002.026 2.152 2.619 2.893.600.822.490 3.785.642.329 3.299 2.377.164.141.8 MJ ERVIN & ASSOCIATES 88 .411.677 3.580 3.532.693 3.710.422.765 3.960.287 2.322 2.9 21.188 3.641.176 2.301.8 21.592 2.450 2.613 3.931 3.647.733 2.7 28.430.998.651 2.1 23.932 2.3 23.883.4 21.220.140.097 2.095 2.381 2.941 2. Demand.1 23.744.132.475 2.141 3.255 3.6 21.661 Canadian Domestic Gasoline Sales (M3) 2.9 31.9 23.9 23.1 22.281 2.045 2.558.8 23.5 23.5 25.970 3.510 3.732.485 2.995.2 23.7 29.889 3.003.047 3.2 20.687.841 2.871 2.7 24.3 22.7 18.437.612 3.565.269 2.1 23.781.646 2.322 2.283.130 3.279 2.587.509 3.437.022.2 23.4 24.9 30.015 3.853 3.935 3.7 26.083.285 2.767.8 27.673 2. and Pump/Rack Prices Net Canadian Closing Supply: Gasoline Canada Production (M3) Inventory (M3) Jan-91 Feb-91 Mar-91 Apr-91 May-91 Jun-91 Jul-91 Aug-91 Sep-91 Oct-91 Nov-91 Dec-91 Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 2.112 2.0 28.0 20.5 27.967 2.969 2.8 22.324 2.752 2.335 2.798.235 3.075.209.897.254.804 3.333.725.666.615 2.270 3.9 26.865.8 26.409.808.101.179 3.8 33.930.201.4 21.354.051 3.818.181.566.3 23.251.085.441.286.884 2.4 32.193 3.416 2.804 2.073 2.000 3.0 24.709 2.141.1 21.930 3.232 3.192.8 23.262.5 31.878 2.968 3.748 2.297 2.966.301 2.979 3.142.

601 3.0 25.597 2.669 2.363.785.649.214 2.048.986.984 3.2 25.4 26.182.4 26.555.638 2.005 2.9 22.593.198.074.648 3.097.414 3.671.936 3.320 3.0 26.930.857.426.5 source: Statistics Canada (production.344 3.244 3.796.5 21.521 2.170 3.773.994 3.219 Canada Avg ex tax RUL pump price (¢/l) 27.415 2.179.8 28.170 Canadian Retail Gasoline Sales (M3) 2.068.692.679.977.148.840 2.799 2.607.649.324.198 2.294 3.906.376.919 2.0 24.717.336.658.519.082.006 3.222 2.205 2.077.055 2.714 2.370.970.806.7 19.264 2.184.467 2.7 22.9 29.195.830 3.660 3.864 2.0 25.6 20.8 21.4 20.5 21.386 3.442 2.112 3.149.675 2.469.889.825.1 24.4 25.261.753 3.539.881.2 25.505 2.537.606.620.965.703 3.1 21.123.644 3.155 2.997 2.516 3.250.871 3.Net Canadian Closing Supply: Gasoline Canada Production (M3) Inventory (M3) Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 3.390.338 2.317 2.315.999 3.382.130 3.204.0 26. inventory) / Natural Resources Canada (price) MJ ERVIN & ASSOCIATES 89 .791 3.961.6 20.037 3.8 25.198.324 2.7 21.8 24.264 2.346 2.863.614.928 3.797.141 2.566 3.5 25.2 26.667 Canadian Domestic Gasoline Sales (M3) 3.480 2.8 20.7 Canada Avg RUL Rack Price (¢/l) 20.904.940 2.617 2.656 3.165.386 3.483. demand.9 27.

6 46.5 58.3 54.4 50.5 57.9 52.9 58.5 51.7 White Rock Calgary 45.9 53.2 43.4 52.7 65.0 61.3 54.6 47.4 55.4 59.5 51.9 47.1 44.Study Markets RUL Pump Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Victoria 54.5 45.0 55.5 60.9 64.8 52.4 52.5 55.8 56.8 44.5 49.9 62.0 39.9 56.3 52.1 53.2 56.4 56.5 62.4 52.5 61.9 55.8 57.7 49.7 63.1 50.5 57.4 53.5 59.3 49.9 56.9 58.6 44.4 46.5 56.2 59.8 48.9 62.8 49.5 59.8 54.7 53.9 56.2 51.8 59.9 54.8 56.7 53.7 46.0 54.7 50.5 45.2 63.7 50.6 53.6 47.4 57.9 61.9 47.0 57.9 49.4 55.5 59.8 48.8 47.5 51.5 47.4 55.6 62.4 55.7 44.9 61.0 61.2 62.4 55.5 57.9 56.8 59.5 57.5 59.9 56.8 56.5 60.8 47.7 48.2 51.9 52.1 56.5 56.8 50.2 55.5 60.3 52.9 61.2 62.7 65.4 54.9 53.9 61.5 58.6 50.2 62.4 57.7 54.0 62.8 41.5 51.0 50.9 57.5 57.9 64.9 52.4 61.9 56.2 46.5 56.9 54.7 65.5 57.5 54.1 52.5 53.9 56.5 59.5 47.4 52.5 50.9 52.5 58.4 56.9 64.2 46.2 65.6 52.1 55.6 58.5 57.4 56.3 56.7 51.4 54.2 54.3 48.1 52.5 57.5 58.9 53.0 48.9 58.5 60.8 53.5 46.6 47.5 55.9 53.4 52.2 58.1 60.9 54.5 56.1 59.9 49.1 43.6 51.2 57.1 49.7 54.9 61.1 55.8 53.9 53.5 59.4 49.5 58.3 55.3 55.8 48.2 50.2 62.6 56.8 56.9 50.8 64.8 52.9 53.5 57.6 48.9 44.4 46.8 56.9 51.9 54.9 56.5 59.4 63.2 48.6 59.2 62.4 55.9 59.9 64.5 58.0 52.5 Vancouver 53.1 44.2 54.6 49.8 50.6 50.4 56.0 52.6 48.9 55.4 47.5 59.2 62.9 53.7 57.0 44.Table D: Pump Price History .6 54.1 49.6 58.9 57.3 61.2 51.8 48.9 54.9 53.2 62.9 51.9 52.0 61.3 51.9 59.8 52.0 58.7 54.6 55.5 52.7 62.9 56.4 61.9 52.8 53.7 45.2 62.1 50.1 49.0 46.9 56.7 53.4 Winnipeg 49.9 47.9 58.8 57.9 51.9 55.9 54.0 Sioux Lookout 62.9 64.6 46.0 62.4 65.5 58.9 54.5 59.4 46.9 MJ ERVIN & ASSOCIATES 90 .2 46.0 61.7 51.8 51.5 61.2 47.0 62.8 52.8 56.8 52.7 52.0 59.6 55.5 53.0 61.5 57.4 56.3 59.6 53.4 48.7 65.7 65.9 53.1 41.3 52.3 50.4 58.5 53.2 Nanton Peace River Regina 49.5 56.7 62.9 44.5 58.3 62.6 48.2 65.9 63.2 61.6 54.5 47.5 57.9 56.9 53.3 52.7 48.7 45.0 59.5 60.9 52.7 52.5 60.1 55.5 57.5 54.3 48.4 56.9 47.2 54.8 53.9 49.9 55.9 45.5 51.2 50.9 51.5 58.4 54.8 45.5 58.5 58.4 53.7 57.4 61.9 46.2 50.5 58.2 62.8 Thompson 59.5 57.3 42.8 55.7 51.3 52.1 53.9 48.4 58.0 61.3 50.3 49.5 52.9 61.9 54.4 53.9 53.0 61.9 58.

1 60.5 48.2 57.6 58.2 57.2 Montreal 63.2 55.6 Canada Avg 55.0 54.3 60.3 56.6 52.5 54.4 58.0 52.1 58.8 52.1 51.7 55.6 58.6 63.2 54.9 53.6 61.2 59.1 Toronto 52.2 49.2 56.7 56.0 52.9 54.2 57.2 57.7 54.9 64.5 59.0 57.0 52.3 59.0 61.8 61.0 55.1 59.5 54.5 60.0 60.0 53.2 61.2 53.2 58.4 54.2 54.1 52.1 53.1 54.0 54.2 56.7 51.5 Ottawa 58.4 45.9 57.6 53.9 55.8 53.7 52.5 53.1 58.6 58.0 48.5 57.9 49.5 53.9 49.9 57.5 52.6 52.6 54.8 55.4 57.0 50.8 53.3 59.7 54.9 56.1 56.9 55.8 51.9 55.9 49.9 58.3 55.1 53.8 54.0 55.7 52.3 52.8 57.2 52.0 52.7 53.9 64.2 51.8 56.9 61.1 55.5 64.2 54.3 54.0 58.1 51.5 51.6 55.6 63.8 54.3 59.9 60.2 53.0 55.0 55.5 59.4 57.7 54.6 59.1 58.2 58.3 58.4 52.1 56.7 57.2 57.3 54.1 57.2 59.6 55.6 61.3 54.8 55.1 54.6 52.9 55.5 57.1 53.9 61.4 58.6 51.5 54.1 54.4 49.7 59.4 53.2 Chicoutimi Gaspé Saint John 60.5 57.9 58.9 56.9 53.0 48.9 63.4 54.2 55.4 58.7 57.6 50.6 56.7 64.9 52.6 53.4 57.8 60.7 60.2 52.0 52.0 55.1 48.9 61.4 55.7 59.9 56.8 53.1 53.3 59.1 55.7 56.7 48.2 54.9 55.4 54.0 49.4 50.5 52.4 60.4 57.2 60.0 56.5 56.1 49.8 49.8 47.0 54.9 57.8 57.3 54.4 57.0 57.6 59.3 53.5 63.5 51.6 50.5 61.3 55.4 53.4 51.4 55.6 51.7 51.2 56.9 55.4 53.2 56.2 56.3 54.9 54.8 60.8 54.9 55.2 58.8 59.9 64.1 52.3 55.5 55.2 55.3 54.3 54.5 53.7 50.6 58.8 49.5 51.5 51.3 49.7 57.6 49.6 52.5 63.5 56.3 61.6 54.0 60.5 61.7 48.6 52.2 55.7 56.6 54.3 56.7 52.3 52.5 61.3 53.9 49.7 54.1 53.0 51.9 55.1 57.8 55.2 51.0 50.6 56.6 55.3 62.0 47.2 56.7 58.9 50.2 56.5 52.0 52.6 55.5 60.5 MJ ERVIN & ASSOCIATES 91 .6 54.3 53.6 50.9 61.0 56.9 60.0 60.1 61.8 54.6 59.5 54.6 51.0 53.6 55.1 57.8 55.6 56.2 54.1 60.1 55.5 56.2 60.0 59.5 58.7 58.6 58.2 57.1 55.5 53.0 57.9 61.8 55.1 61.4 52.0 50.4 51.7 56.5 55.6 49.5 55.3 52.4 58.0 61.1 54.0 60.7 46.9 53.6 56.2 61.1 54.3 57.8 52.7 51.8 55.5 56.3 55.4 53.9 60.3 55.2 57.3 54.4 51.1 55.2 56.1 52.8 Halifax Charlottetown 60.6 52.1 58.2 49.7 49.5 57.7 56.1 61.4 54.1 55.8 50.2 57.3 49.7 53.6 53.6 60.7 57.3 52.2 53.8 55.0 51.3 56.4 58.0 57.5 52.6 63.0 59.9 62.6 53.9 53.8 55.7 51.9 56.8 50.5 64.2 50.6 52.6 57.9 51.5 56.5 59.3 56.8 63.7 44.0 55.5 54.4 54.9 55.0 47.2 55.7 54.0 56.2 55.3 51.6 54.2 49.8 61.3 53.3 56.8 50.4 58.2 52.6 55.9 55.9 54.2 57.2 49.3 55.6 55.2 61.7 56.4 54.9 53.8 57.6 54.7 54.5 54.0 54.7 47.5 54.8 56.2 51.Table D: Pump Price History .3 54.9 57.5 67.Study Markets (cont’d) RUL Pump SS Marie Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 52.3 53.1 59.6 54.4 54.5 57.4 54.1 54.0 59.2 57.1 51.7 57.1 56.5 63.0 53.4 57.

2 27.5 29.8 25.1 27.0 26.0 31.8 Toronto extax 26.6 29.1 27.4 31.8 27.0 24.6 26.4 MJ ERVIN & ASSOCIATES 92 .8 Dec-93 26.5 27.6 Jun-92 32.8 24.9 29.2 26.9 23.2 28.8 24.9 Jul-93 28.7 26.5 Oct-95 30.0 32.2 27.7 28.2 Nov-94 29.4 27.8 28.1 25.0 Oct-93 28.6 Sep-93 28.2 22.2 28.9 Aug-93 30.5 27.9 26.4 22.5 26.5 29.3 30.3 30.7 Sep-94 32.8 Jan-94 25.9 21.1 22.9 27.6 24.1 Apr-94 29.5 24.3 29.6 30.3 29.6 27.5 24.6 26.7 29.1 30.7 Aug-92 24.5 27.4 27.6 29.2 24.4 23.4 23.3 30.5 Sep-92 29.6 26.3 28.4 20.9 26.0 25.5 Jul-95 30.3 29.5 29.6 26.7 Jan-92 31.9 26.4 24.8 29.8 25.1 28.0 26.8 25.2 24.3 28.3 29.8 28.9 29.3 29.3 29.2 24.0 May-92 28.9 24.9 30.4 23.4 25.9 30.5 29.6 25.3 Jan-93 30.7 29.4 30.2 29.9 27.6 22.4 27.2 26.7 30.7 28.7 31.5 Aug-94 28.3 24.6 27.1 31.2 25.4 Jun-95 30.8 29.6 21.0 24.2 28.4 31.1 22.4 25.3 31.0 May-93 29.4 30.4 25.8 26.6 23.5 25.8 29.4 Mar-92 28.9 Oct-94 32.8 27.6 22.3 21.1 24.8 27.3 24.7 28.8 Feb-94 24.4 24.9 24.7 30.7 Jan-95 27.3 26.4 28.3 23.7 29.2 Nov-92 31.Study Markets RUL Extax Victoria extax Vancouver ex Calgary extax tax 32.6 27.9 27.4 29.6 25.0 27.0 25.3 23.3 28.4 29.1 31.7 Mar-94 28.0 22.4 31.7 29.5 21.9 25.6 30.2 23.6 Mar-93 28.6 Aug-95 30.3 29.1 25.9 26.9 20.0 Apr-92 30.3 32.1 24.8 27.2 26.9 28.1 24.4 26.0 28.7 Sep-95 30.4 22.9 25.9 27.3 29.7 28.1 Mar-95 29.8 29.9 23.3 26.3 27.7 28.5 Jul-94 29.7 26.7 30.4 22.3 26.0 29.6 26.2 Dec-94 26.8 26.6 28.4 21.3 27.9 31.9 25.3 28.6 26.7 25.3 24.4 27.3 28.7 26.6 29.0 23.6 29.4 31.2 29.9 25.7 27.4 25.9 24.8 28.2 Nov-93 27.7 30.0 24.4 Dec-92 31.9 21.6 24.7 28.7 Winnipeg extax 27.7 27.4 30.0 23.9 25.2 32.5 27.4 29.5 27.4 31.7 24.7 30.1 30.0 23.0 Jun-93 26.6 27.0 26.8 27.4 27.4 25.3 29.3 Jul-92 31.5 29.5 26.9 28.3 Dec-95 Edmonton Regina extax extax 27.0 25.8 24.6 May-95 29.3 Feb-95 26.5 23.1 Apr-95 30.2 25.6 23.1 19.9 24.4 31.9 28.2 26.1 26.3 26.7 24.1 25.5 23.5 21.9 30.4 29.8 23.Table E: Ex-tax Pump Price History .0 23.8 22.4 30.9 29.7 26.4 31.2 Apr-93 28.4 28.9 28.3 29.0 31.1 20.5 Oct-92 30.1 28.3 30.4 29.5 Nov-95 30.4 20.0 21.1 23.4 29.5 Feb-92 28.8 26.2 24.1 25.2 28.6 23.8 21.8 26.4 28.1 Feb-93 29.9 24.1 26.8 24.0 23.8 27.0 27.6 26.6 23.4 29.6 28.6 30.4 20.6 26.5 28.3 33.3 26.5 24.8 31.3 May-94 28.2 Jun-94 31.

9 26.6 28.2 24.9 31.1 34.2 22.4 25.4 25.1 32.9 23.9 29.1 29.1 28.5 34.3 34.0 36.4 26.0 25.1 30.4 36.7 26.9 30.3 34.6 32.7 24.2 24.0 23.2 33.6 23.8 26.4 28.8 26.0 29.1 31.9 32.8 25.0 28.5 32.0 28.6 27.7 24.4 22.5 26.7 30.2 25.8 26.5 24.0 26.0 23.7 34.0 28.2 32.5 36.9 29.3 29.2 30.8 36.1 25.8 23.9 32.8 33.2 22.8 29.9 28.4 31.6 27.6 31.3 27.5 25.2 22.7 32.9 28.7 26.0 25.3 28.6 32.3 31.4 32.4 31.6 29.5 25.9 27.7 29.3 31.4 27.5 29.5 31.9 35.1 Montreal extax 31.9 30.2 Saint John Halifax extax extax 34.4 24.5 28.6 23.5 31.6 25.6 32.5 33.4 36.1 24.8 30.5 25.3 25.8 27.7 26.4 33.5 27.1 26.4 33.7 MJ ERVIN & ASSOCIATES 93 .8 29.5 26.1 22.1 32.9 37.4 33.6 32.8 25.6 28.1 28.3 28.0 25.Study Markets (cont’d) RUL extax Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Ottawa extax 31.3 29.4 32.9 33.6 Charlottetown extax 36.8 30.7 23.0 26.7 30.3 26.5 25.0 34.4 21.7 24.3 33.3 27.0 34.7 27.8 29.3 30.6 36.3 34.3 29.8 28.7 28.1 24.2 26.2 25.2 27.1 30.6 33.2 28.0 28.2 36.6 26.3 31.1 24.2 29.2 26.4 28.9 32.2 30.6 31.8 32.3 28.5 28.9 32.7 32.5 27.5 24.7 22.2 28.8 28.6 22.0 36.6 28.2 32.5 30.7 26.0 30.8 30.5 28.6 32.7 27.3 23.2 28.5 25.0 31.6 33.8 28.2 26.4 25.2 27.8 28.5 27.9 29.0 33.2 27.3 31.3 22.7 28.7 26.2 27.9 29.3 26.8 27.5 33.1 29.7 Quebec extax 32.5 25.6 26.9 29.8 29.9 30.5 30.2 27.8 32.8 26.5 33.3 28.3 29.1 29.7 23.4 26.0 33.7 32.7 34.7 28.7 23.8 27.0 26.2 34.2 26.0 28.9 31.9 24.6 24.3 26.8 25.2 26.3 28.9 29.8 23.8 26.6 29.7 29.4 33.8 Canada Avg extax 29.9 29.6 28.3 35.1 30.0 29.9 27.8 28.1 32.7 27.8 25.9 30.8 29.1 26.0 30.3 25.3 25.2 27.8 23.2 27.9 26.7 24.7 27.5 30.0 33.6 36.5 27.2 27.6 34.2 36.3 25.8 27.9 30.8 28.1 23.7 25.0 32.4 31.2 25.9 27.9 26.8 32.2 27.6 28.3 24.1 24.9 27.6 27.2 32.4 26.6 34.7 33.2 30.7 28.4 32.4 25.0 32.8 23.6 25.7 26.8 32.2 23.2 22.6 26.4 24.4 34.0 33.1 32.Table E: Ex-tax Pump Price History .0 29.9 33.6 26.7 24.1 34.9 27.8 33.7 28.3 29.5 28.0 33.2 33.0 27.2 25.0 34.1 34.8 24.3 31.2 21.4 33.

4 21.7 17.3 22.1 16.1 20.0 21.2 21.1 20.9 19.4 21.5 18.2 22.9 22.4 21.9 20.8 21.7 20.0 21.1 19.8 21.1 21.3 23.3 20.0 23.1 22.1 22.5 23.5 17.6 23.3 20.9 25.5 22.4 20.9 22.7 20.8 18.7 21.0 22.5 22.5 24.9 21.5 27.4 22.2 Quebec city Montreal rack Toronto rack rack 19.2 16.2 19.1 20.2 17.9 21.8 23.3 23.1 22.4 18.8 21.6 20.2 21.5 22.3 23.0 21.4 20.6 23.3 21.0 23.7 18.6 21.4 21.8 18.7 22.9 21.4 21.8 25.5 19.5 22.5 19.4 22.6 19.1 20.5 21.3 18.3 21.7 23.9 22.5 21.7 MJ ERVIN & ASSOCIATES 94 .8 21.2 23.3 19.4 20.1 21.4 17.3 19.8 21.7 22.3 17.5 17.2 23.5 23.9 18.1 21.6 22.4 21.3 23.2 22.1 15.9 22.6 21.5 24.3 21.0 21.6 20.2 22.2 23.4 21.0 22.9 20.1 Halifax rack 20.9 23.1 20.1 18.8 22.4 22.7 22.8 21.7 22.1 19.2 21.8 20.3 20.4 20.6 19.4 23.3 24.7 18.8 20.2 23.0 20.2 21.3 19.2 21.2 29.5 22.0 20.1 21.2 19.6 23.7 20.9 24.7 22.8 23.2 18.4 22.8 19.1 22.6 23.6 20.6 20.1 24.1 21.2 18.0 22.6 19.8 23.4 22.6 19.8 22.2 21.0 19.2 16.Table F: Rack Prices .4 23.4 21.4 22.7 19.8 20.0 19.0 23.3 18.9 22.1 22.0 21.5 20.3 24.9 17.2 16.1 22.3 22.3 23.2 18.8 22.3 23.2 20.4 19.5 21.6 25.7 22.5 26.8 23.3 26.4 24.6 19.8 19.7 21.4 21.2 18.4 21.0 21.3 22.2 21.0 23.2 20.6 18.1 23.6 23.7 21.9 21.1 21.8 24.5 24.6 25.6 20.9 18.0 23.Study Markets RUL Rack Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Saint John NB rack 21.7 23.2 19.4 22.7 17.1 20.5 18.4 22.9 21.1 19.8 20.1 20.9 20.2 21.1 15.8 19.5 23.8 20.4 23.1 23.4 22.9 18.0 21.4 23.5 21.0 22.7 21.4 21.0 19.8 23.7 21.7 16.8 23.0 23.8 20.0 22.8 19.4 22.0 22.9 22.5 20.0 23.5 20.1 21.5 22.6 19.7 19.4 15.9 21.3 23.7 22.3 17.0 23.4 20.9 23.7 22.3 20.5 21.2 20.6 23.2 20.2 20.5 17.8 22.8 27.8 18.8 Ottawa rack Thunder Bay rack 20.1 23.7 17.7 22.3 22.6 25.8 18.6 20.1 22.2 20.5 20.3 21.7 21.8 22.5 21.5 21.6 20.4 21.5 21.3 21.1 20.4 22.0 24.2 18.8 23.3 18.9 18.3 17.1 21.3 19.4 21.7 21.9 22.

9 21.9 22.7 21.4 22.5 22.6 23.5 24.2 24.8 22.6 24.3 23.2 20.8 18.7 24.2 23.5 20.6 21.7 21.9 22.1 18.0 20.7 22.7 23.5 23.9 22.7 22.0 17.7 18.1 21.8 20.4 25.4 23.6 20.5 17.7 19.7 21.5 21.1 23.2 20.3 23.5 24.1 23.2 21.9 21.1 17.4 22.4 21.3 17.9 19.9 23.Study Markets (cont’d) RUL Rack Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Winnipeg Regina rack Calgary rack rack 24.1 22.2 19.5 21.5 21.6 22.3 23.9 23.5 20.9 22.3 22.2 22.7 22.9 23.0 20.9 19.8 20.2 20.5 24.2 24.5 23.6 21.1 22.2 Edmonton Rack 23.9 23.7 23.2 22.4 21.6 21.1 23.7 25.6 22.3 18.4 24.4 20.6 23.2 22.5 22.1 22.6 19.5 21.6 19.5 23.7 22.6 17.8 22.2 24.7 21.9 19.4 21.6 21.7 21.8 24.0 20.2 23.9 22.6 24.1 20.3 24.0 21.1 25.3 19.7 21.6 20.6 23.0 24.3 23.9 21.0 21.9 19.4 21.1 22.1 23.9 20.3 22.9 22.1 23.9 22.7 20.7 17.4 20.0 22.1 22.0 18.6 23.0 18.9 19.3 23.7 22.1 22.5 23.9 17.6 20.9 21.2 20.1 19.3 21.4 24.5 21.3 19.9 21.8 24.6 22.1 23.9 24.4 23.5 19.9 24.0 25.8 21.4 23.5 21.7 22.4 22.2 18.9 18.2 23.5 19.3 24.6 23.6 22.3 20.0 21.7 22.5 23.0 22.9 23.6 17.9 21.5 21.4 21.1 21.2 23.4 19.0 22.8 22.3 24.8 20.0 24.0 21.3 17.0 22.4 21.5 23.3 22.4 21.8 21.7 21.1 16.1 16.0 22.9 23.0 23.0 24.9 20.7 24.7 25.3 21.7 23.3 22.1 25.0 23.Table F: Rack Prices .2 22.7 21.7 22.4 22.2 21.3 20.5 21.0 17.2 21.1 25.0 23.7 22.7 17.5 18.0 22.2 22.0 23.1 24.6 21.8 24.1 20.3 21.0 20.9 21.1 23.5 20.9 22.3 20.5 20.5 22.8 21.8 23.5 18.1 21.9 21.3 24.1 19.9 18.1 23.6 21.0 22.1 20.3 21.7 24.5 MJ ERVIN & ASSOCIATES 95 .6 25.8 19.6 21.7 21.5 24.5 21.1 18.0 24.6 23.2 23.8 22.1 21.7 21.1 23.5 22.9 19.2 22.8 22.2 19.1 21.6 21.3 23.4 21.1 21.7 23.4 22.4 23.2 21.7 21.9 19.0 23.2 22.3 20.8 22.5 Canada avg rack 22.1 23.7 21.3 17.6 20.6 23.5 23.8 23.2 21.9 21.6 23.5 22.5 19.8 23.7 23.1 21.6 21.0 22.2 20.4 18.8 25.2 22.6 25.1 21.3 23.5 22.4 24.5 19.2 23.8 20.2 24.4 19.9 24.8 20.9 20.0 21.4 24.7 22.2 24.8 21.5 21.6 21.8 Vancouver Victoria rack rack 24.9 22.8 23.6 25.

23 63.214 248. Urban.438 591.704.000 217.412 722.45 53.985 636.102 98.712 1.72 63.897 350.018.40 63.903 33.89 60.933 25.830 2.40 58.53 48.19 52.671 399.03 58.238 2.73 65.000 1.018 2.70 55.16 59.88 54.35 73.414 450.166 102.420.745.97 51.60 49.895 600.972 429.93 63.60 50.643 184.268 478.30 68.Throughput and Price by Grade 1995 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Group B All Study Mkts Average Throughput (Litres) Premium Midgrade Regular 661.00 57.298 576.66 50.890 2.669 203.00 57.000 1.030.90 67.02 51.153 316.516.508 2.858.00 67.50 56.85 48.10 63.483 63.009 54.26 44.30 54.400 142.971 473.20 54.98 59.625 64.997 397. and All Study Markets are weighted (by market population) averages.058 2.832 91.850 126.97 63.83 68.370 41.145.74 57.686 273.141.25 57.056.80 64.11 58.20 61.332 101.19 49.72 58.34 63.30 57.94 55.23 53.698 Note: Regional.796 2.983 1.529 123.86 56.32 51.20 59.Table G: Study Market Data .192 2.28 65.859 240.42 53.636.945.150 48.20 58.17 Diesel 64.55 58.250 748.30 52.53 61.113 2.40 61.70 49.811 120.119 632.922 103.22 59.597 2.10 59.554 2.246 2.00 48.549 111.00 62.628 702.460 833.26 63.500 378.40 54.38 56.377 30.78 67.334.448.678.30 54.620.557.89 65.211 15.60 60.60 70.014 3.220 389.92 51.00 66.241 451.65 54.837 329.060.87 61.834 71.296 179.50 55.300 578.614 3.796 529.173 568.935 758.50 56.10 53.702.30 63.905 183.88 64.749 91.196 669.702 333.621 102.30 66.120 570.327 Average Pump Price (¢/litre) Premium Midgrade Regular Diesel 63. MJ ERVIN & ASSOCIATES 96 .90 63.40 59.07 61.093.543 2.13 58.483 2.687 1.72 74.980 120.949 1.85 54.513 19.234 799.245 351.26 49.101 256.174.249.749 243.20 60.18 51.475 1.45 63.894 1.770 2.052 84.810.89 61.24 61.790 185.101 447.90 62.000 63.10 52.48 56.36 54.204.194.

41 22.43 21.81 27.31 22.42 24.83 24.63 28.23 23.59 22.50 20.92 21.25 31.08 25.85 28.13 23.07 24.92 22.83 24.97 25.90 26.38 24.84 28.76 25.53 23.92 30.36 26.78 Product taxes Midgrade Regular 26.47 28.63 25.39 22.04 26.96 22.28 23.21 27.82 28.15 27.49 25.59 22.43 20.42 24.42 27.87 26.59 28.37 27.81 28.65 21.59 28.33 27.58 25.73 26.81 21.45 29.88 22.34 25.07 26.42 25.45 20.43 28.83 23.32 33.45 20.56 22.89 29.89 25.57 22.51 25.38 24.34 26.34 20.93 27.36 24.50 25.74 21.95 22.97 23.35 25. Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Group B All Study Mkts Victoria Vancouver Vancouver Calgary Regina Winnipeg Calgary Edmonton Winnipeg Toronto Ottawa Toronto Winnipeg Montreal Quebec Montreal Saint John Halifax Halifax 1995 Average Rack Price (¢/litre) Premium Midgrade Regular Diesel 26.33 21.92 20.07 24.45 23.88 28.03 21.20 20.17 20.49 31.88 20.47 20.68 Diesel 36.91 21.04 24.98 28.69 27.03 24.45 20.63 26.18 25.75 22.27 20.73 32.45 29.59 28.83 24. Urban.39 21.84 28.33 22. MJ ERVIN & ASSOCIATES 97 .63 20.54 28.08 23.01 28.90 27.40 27.55 28.33 21.49 21.02 23.49 21.15 24.89 26.27 29.16 21.33 22.51 25.39 Note: Regional.45 24.25 27.81 25.40 25.64 28.83 22.23 26.11 26.95 Premium 26.89 28.45 22.43 21.45 28.48 25.47 27.25 28.43 20.99 26. Tax (by Grade) Rack Pt.59 24.69 23.75 27.03 20.20 27.Rack Price.26 27.33 21.33 22.15 29.65 26.18 28.63 21.16 29.23 25.98 25.82 21.16 22.45 24.88 20.25 24.21 27.83 25.93 23.51 20.32 21.45 20.65 27.96 24.88 28.28 22.95 22.88 22.07 24.63 24.41 27.30 29.99 28. and All Study Markets are weighted (by market population) averages.01 22.15 20.09 27.57 29.94 23.39 22.26 28.51 31.39 21.33 21.06 28.45 25.96 24.93 23.07 26.09 24.Table H: Study Market Data .76 24.95 25.23 24.33 21.97 22.55 28.

82 32.58 66.34 1.17 1.08 17.01 0.49 2.20 14.80 1. MJ ERVIN & ASSOCIATES 98 .13 28.12 6.02 22.33 .38 0.98 1.27 6.01 31.93 22.66 28.99 2.06 0.81 28.03 7. Average Deviation is the average deviation of the market values from their mean (average) value.84 28.64 2.77 37. Costs.75 23. and All Study Markets are weighted (by market population) averages.18 55.24 23.29 7.38 28.35 60.83 12.64 3.53 6.22 5.50 10.68 2.51 11.85 11.15 66.033 0.59 4.99 0.24 7.04 23.72 26.31 23.92 22.20 5.23 7.17 26.28 1.81 26.29 8.73 1.90 23.41 7.63 58.83 1. Urban.45 1.64 3.78 2.94 22.82 95 Retail Gross Product Margin 6.Blended Prices.23 38.57 12.30 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Variance Avg Deviation Group B Variance Avg Deviation All Study Mkts Variance Avg Deviation 57.35 58.00 58.44 33.91 29.08 55.08 3.33 9.77 30.38 7.38 2.52 5.96 3.90 59.41 29.42 2.44 25.04 22.50 0.79 33.31 0.32 31.95 6.45 6.29 24.07 0.88 31.26 5.89 0.54 50.16 20.96 27. Margin Cents per Litre 95 Blended Pump Price 95 Blended tax 95 Blended Extax Price 95 Blended Rack Price 95 Retail Freight Cost Gross Marketing Margin 6.22 1.83 36.93 56.60 23.(∑x)2 ]/n2.13 0.43 23.30 12.34 0.14 7.89 28.21 24.86 49.36 20.63 60.04 0.83 27.26 27.64 1.91 2.28 27.80 9.17 9.62 56.41 12.04 28.49 57.07 30.31 34.00 4.96 25.25 1.97 0.50 58.53 22.68 7.91 0.39 56.79 0.27 11.16 54.98 31.07 0.94 17.31 28.50 3.60 14.75 28.26 3.18 7.88 5.96 28.18 21.21 8.14 60.10 3.86 28.06 5.48 7.10 6.83 21.77 5.47 58.35 27.85 26.03 28.12 23.17 11.27 62.28 56.28 1.02 13. Variance uses the formula [n∑x2 .53 21.00 0.85 21.95 21.82 3.91 22.98 0.89 21.73 22.56 4.37 26.30 5.19 5.11 26.85 24.68 7.06 28.70 22.22 14.98 0.16 3.02 3.60 7.05 6.71 33.38 22.24 7.00 22.58 1.76 5.73 10.21 8.11 31.02 0.13 11.94 Note: Regional.08 0.56 24.27 60.36 0.35 28.Table J: Study Market Data .73 2.84 5.43 0.47 0.52 30.44 56.

632 $ 256.241) $ (227.520 5.089.648 3. For 95 net retail petroleum revenue.694 3.934 3.623 2.626 $ 81.465.272 $ 210.827.011. MJ ERVIN & ASSOCIATES 99 .Table K: Study Market Data .246 $ 118.707 $ 260. Outlet Costs.263 $ 60.120 $ 54.223.209 $ 82. these averages are based on all applicable study markets.265.564 $ 252.911) $ (166.871) $ (128.746 $ (374.510 $ 60.004.557) $ 102.279 $ 154.000 2.630 3. Revenue.640 4.367) $ (164.Sales.688 $ 85.102 $ 223.478 4. Income Average Outlet Sales (litres) Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Group B All Study Mkts 3.000) $ (241.772.550 $ 177.604.900 $ 179.805.885.071.224 $ 189.966 3.677 $ 180.209 $ 26.852) $ 119.157.800 $ 225. but for ancillary revenue.095.208) $ (226.244 95 net retail Ancillary Revenue petroleum revenue $ 208.074 $ 131.875 $ 255.429 $ 238.302 $ 69. and All Study Markets are weighted (by market population) averages.032 $ 77.794 3.572) $ (286.719 3.197.295 $ 174.526 $ 207.467 $ 96.250.129 $ 97.144 2.014.481 $ 96.542 $ 222.116 Outlet costs 95 Consolidated Retail Outlet Income $ 126.856 3.995 $ 234.081 $ 222.217 2.766) $ (274.013 $ 227.502 $ (80) $ 60.913 $ 139.272 $ 118.010 1. and consolidated outlet income these averages are based only on those markets with available data.000 $ 156.716 Note: Regional.098.375) $ (49.890.098 $ (320.993 $ 113.117 $ 207.135 $ 199.550 694.247 4.023 $ (15.866) $ (244.058.780 $ 85.837 $ 56.544 $ 175.948 3.658.289 981.855 $ 278.067 $ 92.900 2.638 2.332) $ (238.542.622 $ 174.068 3.750 $ 271.143) $ (249.779 $ 121.394. Urban. outlet costs.646) $ (98.956) $ 200.066 3.

475 3.45 14.52 13 5.827 3.79 6.01 7 2.775 678.10 3.145 81.400 74. rank* 3.60 3.30 0.40 9 4.157 2.223 3.84 12 5. N refers to study sample size (total = 481).08 16 3.265 2.50 9.604 3.17 rank* 7 9 9 6 8 11 3 16 17 1 4 12 18 2 15 19 13 5 14 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown Gross Product Margin ¢/l rank* 6.890 rank 9 4 5 3 10 8 15 13 16 1 2 6 19 7 12 18 14 11 17 ¢/l 6.095 3.48 7 7.605 16.96 5.21 0.Table L: Study Market Data .098 4. of Outlets No.51 9 11.23 6 7.00 11.91 17 4. inverse ranking is used (lowest value = 1).970 330.315 710.85 15 11.20 0.08 4 2.38 0.97 8.20 17 14.658 3.790 1.50 8.310 1.550 1.24 0.73 14.54 6 2.50 3 10.47 14 3.41 0.29 1.95 3 9.058 1.22 3.53 10 6.47 7.02 0.98 6.94 18 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown Avg Volume per Outlet Marketing Margin 000's litres 3.42 5 14.275.88 12 7.76 18 5.55 19 11.60 11 7.465 694 3.36 5.80 10 4. MJ ERVIN & ASSOCIATES 100 .06 5.27 1. 106 446 8 313 86 261 5 8 6 546 209 24 3 866 97 8 56 113 23 rank 8 3 14 4 10 5 18 14 17 2 6 12 19 1 9 14 11 7 13 No.13 2 11.43 12.071 2.03 14 N= 26 37 5 69 30 61 2 4 4 59 39 12 2 74 16 2 17 18 4 Note: Where an * appears after “rank”.27 0.68 4 7.250 981 2.98 7.845 15.395 rank 8 3 14 4 9 6 19 17 16 1 5 11 18 2 10 13 12 7 15 No.675 179.089 3.14 rank* 10 9 12 3 1 2 10 16 17 7 6 15 18 7 13 19 4 4 14 rank 9 5 17 3 7 6 17 13 15 2 4 10 19 1 8 13 11 11 15 Est Outlets / 10.88 11 8.06 16 4.870 120. of Brands No.542.04 15 4.06 1 5.91 12.90 13 4. 12 18 4 27 15 17 4 6 5 30 19 10 3 32 14 6 9 9 5 Freight ¢/l 0.89 2 4.014 5.41 1.73 5 10.08 3.394 2.715 14.45 0.33 0.22 0.40 1 3.004 3.30 1.28 17.89 7.Demographic Profiles Population pop’n 299 .000 pop’n No.17 19 9.975 2.585 6.180 616.775.29 8 7.745 16.23 8 31.

T2N 1Z6 Phone: (403) 283-8704Fax: (403) 283-9104e-mail: mervin@cadvision. Vice President Public Affairs Address: 275 Slater Street. 119 . K1A 0H5 Phone (613) 941-6219 Fax: (613) 941-2463 MJ Ervin & Associates / Q1 Solutions Inc. Contact: Michael J. K1P 5H9 Phone (613) 232-3709 Fax: (613) 236-4280 Industry Canada Industry Canada is the primary overseer of the Sector Competitiveness Framework (SCF). Contact: Cindy Christopher. Petroleum Products Address: 235 Queen Street. and in doing so. They work with major oil companies in benchmarking performance in the retail.14th Street NW Calgary AB. Contact: Maureen Monaghan Address: 580 Booth Street. Principal Address: #400. and provide background resources to industry public affairs managers and the media. a series of studies whose goal is to strengthen Canada’s competitiveness. aviation and lubricants marketing channels. Ervin. Contact: Brendan Hawley.III Sources of Information about the Downstream Petroleum Industry Canadian Petroleum Products Institute (CPPI) The CPPI is a national association of petroleum refining and marketing companies which serves as the voice of the petroleum products industry in Canada on environment. Senior Advisor. Ottawa ON. K1A 0E4 Phone: (613) 992-1477 Fax: (613) 992-0614 MJ ERVIN & ASSOCIATES 101 . generate jobs and growth. MJ Ervin & Associates is a Calgary-based consulting organization specializing in the downstream petroleum industry. Ottawa ON. cardlock. They maintain a large database of historical prices at most major centres. Ottawa ON. The SCF is the basis for this study. health.com Natural Resources Canada Natural Resources Canada is a key information resource on the matter of petroleum prices. bulk. accessible through a public fax-back dial-in system. safety and business issues.

ABT2P 3H2 Phone: (403) 264-6064Fax: (403) 237-6286e-mail: pcomm@pcf. non-advocacy organization whose mandate is to increase public awareness of Canada’s oil industry. 311 .ab. Executive Director Address: 214. Ottawa ON. Contact: Robert Curran. It reports industry marketing trends and compiles an annual survey of retail and wholesale outlet representation. Its monthly publication “Refined Petroleum Products” (cat. SW Calgary.T2P 3P4 Phone: (403) 266-8700 Fax: (403) 266-6634 Petroleum Communication Foundation (PCF) The PCF is an industry funded. Managing Editor Address: Suite 2450.6th Avenue. Supervisor. Energy Section Address: Statistics Canada. and is a useful “window” on this industry. no 45-004) is a useful source of supply and demand volume data. K1A 0T6 Phone: (613) 951-3562 MJ ERVIN & ASSOCIATES 102 . Contact: Gerard O’Connor. Contact: Len Bradley.ca Statistics Canada Statistics Canada publishes a variety of petroleum industry performance figures. The PCF is a useful resource for any person or organization wishing to become better informed on general downstream infrastructure and retail gasoline price/competition mechanisms. Calgary AB.6th Ave. Octane is published quarterly. 101 .Octane Magazine Octane is Canada’s refining and marketing trade journal.